{"title":"Motivating cost reduction in regulated industries with rolling incentive schemes","authors":"Douglas C. Turner, David E.M. Sappington","doi":"10.1016/j.eneco.2025.108916","DOIUrl":null,"url":null,"abstract":"<div><div>We examine whether an incremental rolling incentive scheme (IRIS) can enhance innovation under performance based regulation (PBR). Under an IRIS, the firm is awarded for a full PBR term the incremental profit generated by a cost reduction regardless of when the cost reduction is implemented. An IRIS enhances incentives for innovation toward the end of a PBR plan and also ensures immediate implementation of achieved cost reductions. However, an IRIS can reduce incentives for innovation early in a PBR plan. On balance, an IRIS often reduces innovation when the regulated firm has limited ability to delay the implementation of achieved cost reductions. More generally, an IRIS can enhance innovation.</div></div>","PeriodicalId":11665,"journal":{"name":"Energy Economics","volume":"151 ","pages":"Article 108916"},"PeriodicalIF":14.2000,"publicationDate":"2025-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Energy Economics","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0140988325007431","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 0
Abstract
We examine whether an incremental rolling incentive scheme (IRIS) can enhance innovation under performance based regulation (PBR). Under an IRIS, the firm is awarded for a full PBR term the incremental profit generated by a cost reduction regardless of when the cost reduction is implemented. An IRIS enhances incentives for innovation toward the end of a PBR plan and also ensures immediate implementation of achieved cost reductions. However, an IRIS can reduce incentives for innovation early in a PBR plan. On balance, an IRIS often reduces innovation when the regulated firm has limited ability to delay the implementation of achieved cost reductions. More generally, an IRIS can enhance innovation.
期刊介绍:
Energy Economics is a field journal that focuses on energy economics and energy finance. It covers various themes including the exploitation, conversion, and use of energy, markets for energy commodities and derivatives, regulation and taxation, forecasting, environment and climate, international trade, development, and monetary policy. The journal welcomes contributions that utilize diverse methods such as experiments, surveys, econometrics, decomposition, simulation models, equilibrium models, optimization models, and analytical models. It publishes a combination of papers employing different methods to explore a wide range of topics. The journal's replication policy encourages the submission of replication studies, wherein researchers reproduce and extend the key results of original studies while explaining any differences. Energy Economics is indexed and abstracted in several databases including Environmental Abstracts, Fuel and Energy Abstracts, Social Sciences Citation Index, GEOBASE, Social & Behavioral Sciences, Journal of Economic Literature, INSPEC, and more.