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| Author: | Clemenz, G. |
| Title: | Optimal price-cap regulation |
| Journal: | Journal of Industrial Economics
1991 : JUN, VOL. 39:4, p. 391-403 |
| Index terms: | R&D PRODUCTION COSTS COST REDUCTION PRICE LEVEL SOCIAL WELFARE |
| Language: | eng |
| Abstract: | The problem of a regulator who cannot observe the research and development expenditures of a firm devoted to reductions in the costs of production is considered. It is shown for a finite horizon model that price-cap regulation does not only provide stronger incentives for cost reductions than does rate of return regulation, but that it is also capable of achieving a higher social welfare level, even if the costs of reviewing the current production costs are negligible. These conclusions are reinforced in an infinite horizon model. (Price-cap regulation means setting a price ceiling, effective at some future date, below which the firm has price flexibility.) |
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