| Abstract: | The regulatory environment is assumed to be characterized by changing labor costs and productivity, and by the existence of set-up costs for rate reviews. If the commission behaves myopically, price changes are shown to occur only when a threshold deviation of actual from target return is reached. During periods where productivity (wage) increases predominate, the actual return is thus consistently higher (lower) than the target level. If, however, the commission incorporates dynamic trends into its decision-making process, there are intervals where actual return both exceeds and falls short of target levels; on average, the firm earns over time a return that is approximately equal to the target level. |
