Efficient Regulation with Little Information: Reality in the Limit?

The authors present a regulatory scheme that converges to Ramsey pricing and productive efficiency even if regulators have little information about technology or demand. The model has firms selecting prices subject to the regulator's requirement that the firm earn a "fair return" on capital at today's capital stock and output levels. Regulators then review later performance, and are more likely to request new rate hearings as the firm's return deviates more from the fair return. As long as regulators do not review negative returns too fast relative to positive returns, these conditions are sufficient for convergence to Ramsey prices and productive efficiency. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.