The Political Economy of Price Cap Regulation

The Political Economy of Price Cap Regulation The last decade has witnessed a dramatic substitutionof price cap regulation for rate-of-return regulationin the telecommunications industry. The 1996Telecommunications Act empowers state regulators toset the terms of competitive entry in local telephonemarkets. We investigate whether the form of regulationendogenously affects the regulator's behavior withrespect to competitive entry. The evidence revealsthat regulators in price cap jurisdictions tend to setmore liberal terms of entry in comparison withregulators in rate-of-return jurisdictions. Thissuggests that price cap regulation suffers fromincomplete contracting, undermining the potentiallysuperior incentive properties of this importantregulatory reform. Review of Industrial Organization Springer Journals

The Political Economy of Price Cap Regulation

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Kluwer Academic Publishers
Copyright © 2000 by Kluwer Academic Publishers
Economics; Industrial Organization; Microeconomics
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