International Handbook on Economic Regulation
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International Handbook on Economic Regulation

Edited by Michael A. Crew and David Parker

Michael Crew and David Parker have compiled a comprehensive, up-to-date and detailed analytical work on leading research issues in the economics of regulation. With contributions from international specialists in economic regulation, the Handbook provides a comprehensive discussion of major developments in both the theory and practice of regulatory economics. This book will be an indispensable source for both students and practitioners of regulation.
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Chapter 8: Information Revelation and Incentives

Phil Burns, Cloda Jenkins and Thomas Weyman-Jones


Phil Burns, Cloda Jenkins and Thomas Weyman-Jones Introduction Regulation is present in a number of utility industries, all of which have different characteristics, but competition is not expected to emerge in these sectors and, hence, regulation is expected to remain in place for some time (indeed indefinitely). The first-best world provides the benchmark case. In this situation the regulator would know, with certainty, the required efficient level of costs and demand for quality of service at all periods in time. The challenge for the regulator is to get as close as possible to first best given the information problems that he or she faces. The range of feasible options available to the regulator, both for getting better information about efficient costs and service levels and for designing incentive mechanisms, will depend on the specific characteristics of the industry and company being regulated. For example, the number of companies in the industry will determine the feasibility of using mechanisms that are based on comparative analysis. Similarly, the extent to which managers are expected to be risk averse will influence the options available to the regulator for trading off incentives and insurance. The legal and institutional framework of the regulatory regime will also influence the choices that the regulator will make. Most notably, the regulator’s ability to commit to particular mechanisms may be determined by the law, and the extent to which the regulator is independent from policymakers may influence the way in which the potentially conflicting objectives of technical efficiency, allocative...

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