Price-Cap versus Rate-of-Return Regulation in a Stochastic-Cost Model
A stochastic-cost model is used to show that both price-cap and rate-of-return regulation lead to overinvestment in capital and to excessive managerial slack. However, they differ in stochastic versus fixed intervals between hearings and in the use of test-year costs versus average costs since the previous hearing. A numerical example illustrates that fixed intervals between hearings improve welfare if hearings are not held too frequently, but most gains go to the firm. More significantly, the use of average-cost data combined with fixed intervals results in dramatic welfare improvements, with most gains going to consumers.
Year of publication: |
1992
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Authors: | Pint, Ellen M. |
Published in: |
RAND Journal of Economics. - The RAND Corporation, ISSN 0741-6261. - Vol. 23.1992, 4, p. 564-578
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Publisher: |
The RAND Corporation |
Saved in:
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