 Dynamically-Efficient Incentive Regulation of Networks with Sunk CostsLewis Evans and Graeme Guthrie No 33509, Working Paper Series from Victoria University of Wellington, School of Economics and Finance Abstract: Incentive regulation allows decentralised decision-making under regulatory parameters set on the basis of industry characteristics. When there is uncertainty, sunk costs, and flexibility in the timing of investment a monopoly will invest later than is socially desirable because it garners only a fraction of the benefits, This study considers the design of regulatory profit caps based on a measure of costs, either historical or replacement costs, to which a regulatory rate of return is applied. It demonstrates that the sources and extent of supply and demand uncertainities, and thereby characteristics of the industry, determine whether historical or replacement cost regulation is desirable. The welfare optimising level of the regulatory rate of return differs between historical and replacement cost regulation, this return is generally higher than the weighted average cost of capital, and welfare is degraded much more if it is set below, as opposed to above, the optimal regulatory return. Keywords: Uncertainty; Sunk costs; Incentive regulation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:33509 Access Statistics for this paper More papers in Working Paper Series from Victoria University of Wellington, School of Economics and Finance Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand. Contact information at EDIRC. |
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