Regulatory Options and Price-Cap Regulation

Tracy Lewis and David Sappington

RAND Journal of Economics, 1989, vol. 20, issue 3, 405-416

Abstract: We construct a simple model of the regulatory process in which a monopoly firm has private information about its capabilities and its cost-reducing activities. The optimal regulatory policy offers the firm a choice between two regulatory regimes, one of which resembles price-cap regulation. The other regime has the firm share realized gains in surplus with consumers. We examine the optimal linking of the two regimes and show how the optimal regulatory policy varies with changes in the technological climate in the industry and with the nature of the information asymmetry between regulator and firm.

Date: 1989
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