Optimal sliding scale regulation: An application to regional electricity distribution in England and Wales

David Hawdon, Lester C. Hunt, Paul Levine, Neil Rickman*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines optimal price (i.e. 'sliding scale') regulation of a monopoly when productivity and managerial effort are not observed. We show generally how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to estimate key parameters and make welfare comparisons of sliding scale regulation with a stylized price cap regime and the First-Best (the full information case). Our method enables us to quantify technical uncertainty as faced by the electricity regulator in the 1990s and shows that there are significant welfare gains from a sliding scale relative to the stylized price cap regime.

Original languageEnglish
Pages (from-to)458-485
Number of pages28
JournalOxford Economic Papers
Volume59
Issue number3
DOIs
Publication statusPublished - Jul 2007

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