The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States

37 Pages Posted: 4 Aug 2009 Last revised: 22 Jan 2016

See all articles by Carmine Guerriero

Carmine Guerriero

Department of Economics, University of Bologna

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Date Written: May 6, 2012

Abstract

The determinants of incentive regulation are an important issue in economics. More powerful rules relax allocative distortions at the cost of lower rent extraction. Hence, they should be found where the reformer is more concerned with stimulating investments by granting higher expected profits, and where rent extraction is less necessary since the extent of information asymmetries is more limited. This prediction is consistent with U.S. power market data. During the 1990s, performance based contracts were signed by firms operating in states where generation costs were historically higher than those characterizing neighboring markets and the regulator had stronger incentives to exert information-gathering effort because elected instead of being appointed.

Keywords: Incentive Regulation; Regulatory Capture; Electricity; Accountability

JEL Classification: L11; L51; L94; D73

Suggested Citation

Guerriero, Carmine, The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States (May 6, 2012). Available at SSRN: https://ssrn.com/abstract=1443382 or http://dx.doi.org/10.2139/ssrn.1443382

Carmine Guerriero (Contact Author)

Department of Economics, University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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