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B. Klein, R. Crawford and A. Alchian, “Vertigal Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics, Vol. 21, No. 2, 1978, pp. 297-326. doi:10.1086/466922
has been cited by the following article:
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TITLE:
Investment Incentives under Price-Cap Regulation
AUTHORS:
David Bartolini
KEYWORDS:
Price Regulation; Investments; Incomplete Contracts
JOURNAL NAME:
Theoretical Economics Letters,
Vol.2 No.5,
December
28,
2012
ABSTRACT: In the literature on price regulation, the price-cap mechanism is seen as a very powerful incentive mechanism towards efficiency improvements. What about quality investments? The empirical literature is not univocal: Some studies suggest a deterioration of quality, while others do not find any statistically significant impact. We analyze the incentive provided by price-cap regulation in a setting in which the investment decisions of the regulated firm suffer from hold-up, and contacts are incomplete. We show that the incentives to invest in cost-saving innovations can be fostered by a price-cap contract with a “sufficient” regulatory lag, while for other types of investments, such as quality enhancement, the same contract does not help. Furthermore, we show that if the firm faces a binding resource constraint the price-cap contract generates a crowding-out effect between the two types of investment. This might explain the non univocal empirical evidence.