Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality

32 Pages Posted: 8 Sep 2004

See all articles by Gianni De Fraja

Gianni De Fraja

University of Nottingham; Universita' di Roma; Centre for Economic Policy Research (CEPR)

Alberto Iozzi

Universita degli Studi di Roma

Date Written: August 2004

Abstract

Vogelsang and Finsinger's seminal paper (Bell Journal of Economics, 1979) proposes a mechanism for price regulation with some desirable properties, such as convergence to a second best optimum. This mechanism applies to situations where quality is fixed: in practice, quality can be varied by the firm, and regulators have typically imposed constraints on the firm's quality choice. This Paper lays a rigorous theoretical foundation to the inclusion of quality measures in the constraints faced by a regulated firm. We identify a potential pitfall in the approach taken in practice by regulators, and show that, in order to avoid it, the regulated firm should be subject to an additional constraint, which, loosely speaking, requires firms' choices not to be too erratic.

Keywords: Regulation, quality, price cap, RPI-X

Suggested Citation

De Fraja, Gianni and Iozzi, Alberto, Bigger and Better: A Dynamic Regulatory Mechanism for Optimum Quality (August 2004). CEPR Discussion Paper No. 4502. Available at SSRN: https://ssrn.com/abstract=588245

Gianni De Fraja (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

Universita' di Roma ( email )

Dipartimento SEFEMEQ
Via Columbia n.2
Rome, Rome 00133
Italy

HOME PAGE: http://www.economia.uniroma2.it/docenti

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alberto Iozzi

Universita degli Studi di Roma ( email )

Via Columbia n.2
Rome, rome 00100
Italy
39 06 7259 5923 (Phone)
39 06 204 02 19 (Fax)

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