The paper "The Political Economy of Incentive Regulation: Theory and Evidence from the U.S. States" by Carmine Guerriero is forthcoming in the "Journal of Comparative Economics."
Abstract: The determinants of incentive regulation are an important issue in economics. More powerful rules relax allocative distortions at the cost of lower rent extraction. Hence, they should be found where the reformer is more concerned with stimulating investments by granting higher expected pro?fits, and where rent extraction is less necessary since the extent of information asymmetries is more limited. This prediction is consistent with U.S. power market data. During the 1990s, performance based contracts were signed by fi?rms operating in states where generation costs were historically higher than those characterizing neighboring markets and the regulator had stronger incentives to exert information-gathering eff?ort because elected instead of being appointed.