Abstract
A substantial body of recent research finds thatprice-cap regulation is superior tocost-based regulation in that many of the distortions associated with the latter are reduced or eliminated entirely. We prove that the hybrid application ofcost-based and price-cap regulation that characterizes current regulatory practice in the United States telecommunications industry may generate qualitative distortions greater in magnitude than those realized undercost-based regulation. It follows thatprice-based regulation in practice may be welfare-inferior tocost-based regulation. The analysis further reveals that the firm subject to this modified form ofprice-based regulation may have incentives to engage in pure waste.
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Weisman, D.L. Superior regulatory regimes in theory and practice. J Regul Econ 5, 355–366 (1993). https://doi.org/10.1007/BF01065402
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DOI: https://doi.org/10.1007/BF01065402