Measuring the Welfare Gains from Optimal Incentive Regulation

Jose Miguel Abito

The Review of Economic Studies, 2020, vol. 87, issue 5, 2019-2048

Abstract: I empirically measure the welfare gains from optimal incentive regulation in the context of electric utilities facing both emissions and rate of return regulation (RORR). I provide evidence that RORR induces lower fuel efficiency, leading to greater coal consumption and higher emissions abatement costs. Replacing RORR with the optimal mechanism of Laffont and Tirole (1986) yields annual welfare gains of $686 million or a 11% reduction in electricity prices. I construct a much simpler two-contract menu that can achieve more than 65% of these welfare gains.

Keywords: Incentive regulation; Electric utilities; Emissions regulation; Mechanism design; Dynamic panel estimation (search for similar items in EconPapers)
JEL-codes: C23 D82 L43 L51 L94 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:87:y:2020:i:5:p:2019-2048.

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