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Implementing Incentive Regulation through an Alignment with Resource Bounded Regulators

November 2012

Policy brief by the Florence School of Regulation

Co-authors: J.-M. Glachant, H. Khalfallah and Y. Perez.

This policy brief summarizes research results about the analysis of incentive regulation tools and their implementation by the regulators. It shows that regulators should choose regulatory tools depending on two criteria.

First regulators should choose regulatory tools considering their own bounded resources. This is because some tools are more difficult and demanding than others to implement while regulatory authorities are endowed with sometimes severely limited resources (power, budget, skills) by the government or legislator.

Second regulators should choose regulatory tools considering the characteristics of network operator type of cost they are targeting. If the targeted cost is out of control of the network operator or uncertainty about this cost is radical, cost-of-service regulation should be implemented. Otherwise, the regulatory tools  depend on  the data set available to the network operator(s) and the regulators. The regulatory tools can then be ranked from the less data intensive one to the more data intensive one: price cap, output regulation, menu of contracts, yardstick competition.

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