Working Paper: CEPR ID: DP4934
Authors: David Hawdon; Lester C Hunt; Paul Levine; Neil Rickman
Abstract: This paper examines optimal price (i.e. ?sliding scale?) regulation of a monopoly when efficiency and managerial effort are not observed. We show how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to make welfare comparisons of sliding scale regulation with a price cap regime and the First-Best (the full information case). Our method enables us to quantify technical uncertainty as faced by the electricity regulator in the 1990s and shows that there are significant welfare gains from a sliding scale relative to the price cap regime.
Keywords: electricity distribution; regulation; sliding scale
JEL Codes: L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sliding scale regulation (L51) | welfare gains (D69) |
| price cap regulation (G18) | welfare gains (D69) |
| sliding scale regulation (L51) | firm behavior regarding cost management (D21) |
| firm behavior regarding cost management (D21) | consumer welfare (D69) |
| regulator's design of incentive schemes (D47) | firm behavior regarding cost management (D21) |
| asymmetric information (D82) | welfare gains (D69) |