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A Modified Yardstick Competition Mechanism

Authors
Publisher
Deutsches Institut für Wirtschaftsforschung (DIW) Berlin
Publication Date
Keywords
  • L11
  • L51
  • D40
  • Ddc:330
  • Regulation
  • Yardstick Competition
  • Mechanism Design
  • Information Asymmetry

Abstract

This paper analyzes a modified yardstick competition mechanism (MYC), where the yardstick employed consists of a tariff basket and total costs. This mechanism has a significant information advantage: the regulator ?only? needs to observe total costs and output of all firms. The modified yardstick competition mechanism can ensure a socially optimal outcome when allowing for spatial and second degree price discrimination, without increasing the informational requirements. We also introduce regulatory lags in the model. A systematic comparison between the results of traditional yardstick regulation and modified yardstick regulation is carried out. Finally, we discuss the applicability of the mechanism.

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