Interactive Glossary

BROWSE:

Price cap excessive returns:

Since a pure price cap regulation can result in a firm obtaining very high realized rates of return under favorable scenarios (and successful cost-cutting), regulators sometimes adopt a hybrid scheme that can involve sharing high returns with customers if those returns exceed a trigger point. In addition, a maximum return can be specified if there are negative political consequences to high reported returns. Note, such sharing rules or caps on returns dampens the firm's incentives for cost containment-leading to incentives similar to those under rate of return regulation.

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