Regulatory incentive policies and abuse |
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Authors: | David E. M. Sappington David S. Sibley |
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Affiliation: | (1) Department of Economics, University of Florida, 32611 Gainesville, FL;(2) Department of Economics, University of Texas, 78750 Austin, TX |
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Abstract: | We examine the incentives for abuse under rate-of-return (ROR) and incremental surplus subsidy (ISS) regulation. Abuse consists of expenditures by the regulated firm that provide private benefits, but do not reduce production costs. We show that ISS regulation provides efficient incentives for owners of the regulated firm to limit abuse by subordinates. We also prove that abuse by owners of the firm will generally be greater (smaller) under ROR regulation than under ISS regulation when consumer demand for the regulated product is inelastic (elastic). Furthermore, we show that to limit abuse and improve welfare under ROR regulation, it can be advantageous to ignore available information about consumer demand. |
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