Optimal Sliding Scale Regulation: An Application to Regional Electricity Distribution in England and Wales
University of Surrey - Department of Economics
Lester C. Hunt
affiliation not provided to SSRN
University of Surrey - Department of Economics; Centre for Economic Policy Research (CEPR)
University of Surrey - Department of Economics; Centre for Economic Policy Research (CEPR); Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics
Oxford Economic Papers, Vol. 59, Issue 3, pp. 458-485, 2007
This paper examines optimal price (i.e. ‘sliding scale’) regulation of a monopoly when productivity and managerial effort are not observed. We show generally how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to estimate key parameters and make welfare comparisons of sliding scale regulation with a stylized 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 stylized price cap regime.
Keywords: JEL classification: L51Accepted Paper Series
Date posted: June 24, 2008
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