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A two‐part incentive scheme to implement productive efficiency over time
Author(s) -
Tam M.Y. S.,
Tam MoYin S.
Publication year - 1992
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090130404
Subject(s) - incentive , subsidy , scheme (mathematics) , regulator , microeconomics , economics , work (physics) , unit (ring theory) , mathematics , engineering , mechanical engineering , mathematical analysis , biochemistry , chemistry , mathematics education , market economy , gene
Under rate‐of‐return regulation the firm is not induced to minimize cost. All the incentive regulatory schemes thus far suggested in the literature have the desirable feature of inducing the firm to do so, but they either require the regulator to have full information about demand or take a number of periods to induce the firm to converge to the optimal output level. Hence they do not work well in the dynamic situation where demand and/or cost changes. In this paper a two‐part negative price incentive scheme is suggested whereby the regulator will implement the subsidy scheme only if the firm charges a price higher than its unit expenditure. This scheme (1) requires limited information for implementation; (2) induces the firm to minimize costs; and (3) under certain situations leads to optimal behavior in one period. More importantly, it will continue to have the above features over time.