INCENTIVE COMPATIBLE MECHANISM DESIGN AND FIRM GROWTH: EXPERIENCES FROM TELECOMMUNICATIONS SECTOR REGULATION

This article evaluates the impact of the introduction of incentive regulation on firm growth among the population of local exchange carriers in the US telecommunications industry between 1988 and 2001. The results show that the rate of return method and other intermediate incentive schemes have had a negative impact on firm growth. Conversely, the introduction of pure price caps schemes had a positive and significant impact on firms' growth. These results highlight the importance of proper and appropriate incentive compatible mechanism design in motivating firms to strive for superior performance. Copyright © 2010 The Author Journal compilation © CIRIEC 2010.