Measuring the Welfare Gains from Optimal Incentive Regulation

• Jose Miguel Abito ^[1]
  1. [1] University of Pennsylvania

     University of Pennsylvania

     City of Philadelphia, Estados Unidos

     
• Localización: Review of economic studies, ISSN 0034-6527, Vol. 87, Nº 5, 2020, págs. 2019-2048
• Idioma: inglés
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• Resumen

  • I empirically measure the welfare gains from optimal incentive regulation in the context of electric utilities facing both emissions and rate of return regulation (RORR). I provide evidence that RORR induces lower fuel efficiency, leading to greater coal consumption and higher emissions abatement costs. Replacing RORR with the optimal mechanism of Laffont and Tirole (1986) yields annual welfare gains of $686 million or a 11% reduction in electricity prices. I construct a much simpler two-contract menu that can achieve more than 65% of these welfare gains.