This paper analyzes the constitutional determinants of cost reimbursement rules. In order to design the optimal incentive schemes, a possibly partisan planner will take into account the market cost structure, the institutional design of the supervision hierarchical structure and its technology. I employ electricity data from the U.S. electric power market to test the models predictions. The evidence shows that reforms from low powered incentive scheme (COS) to high powered one (PBR) are linked to high cost industries, the presence of elected supervisors, high inter-party platform distance and large (slim) majority when the reformer is Republican (Democratic). Moreover, there is some evidence in the data that performance-based regulation lowers regulated prices.
Industrial Policy Political Economy Regulation and Incentives