Efficient Cost Passthrough
Journal of Regulatory Economics, 2001, vol. 20, issue 1, 97 pages
This paper analyzes how far a regulated price should be adjusted to realized marginal cost in a stochastic environment. Lyon (1996) shows that partial cost passthrough will improve welfare relative to an exogenously fixed price cap even if incentives for effort supply are reduced. In this paper a simple regulatory mechanism is presented that achieves full cost passthrough and at the same time provides efficient incentives for effort supply. Copyright 2001 by Kluwer Academic Publishers
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