The two forms of natural monopoly regulation that are typically discussed in Intermediate Microeconomics textbooks are marginal cost pricing and average cost pricing (rate of return regulation). However, within the last 20 years, price cap regulation has largely replaced rate of return...

This paper explores the implications of asymmetric cost information within the context of a regulated natural monopoly. We provide a unifying framework for the analysis of "cost padding" and/or exaggeration, both of which we refer to simply as "misreporting of costs." We study the incentives...