Optimal Price-Cap Regulation

Gerhard Clemenz

Journal of Industrial Economics, 1991, vol. 39, issue 4, 391-408

Abstract: The author considers the problem of a regulator who cannot observe the R&D expenditures of a firm devoted to reductions in the costs of production. It is shown, for a finite horizon model, that price-cap regulation does not only provide stronger incentives for cost reductions than does rate of return regulation, but that it is also capable of achieving a higher social welfare level, even if the costs of reviewing the current production costs are negligible. These conclusions are reinforced in an infinite horizon model. Copyright 1991 by Blackwell Publishing Ltd.

Date: 1991
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