Contingent Pricing and Economic Regulation

Using Weitzman's model of regulation under uncertainty, we analyze a particular contingent price signal under the assumption of many goods and firms. In terms of information assumed available to the regulator, the analysis lies between Weitzman's 1974 and 1978 articles. Under fairly general assumptions, contingent pricing is superior to a pure price or quantity signal either if benefits are separable or if marginal cost estimation errors for different firms are uncorrelated. In more general cases the comparison is a function of such correlations and of the substitutability/complementarity of goods. In the one good/many firm case, the pure price signal is inferior.