Regulatory Contestability and Cost Pass-Through

Abstract Regulatory contestability posits that the threat of economic regulation disciplines pricing even in the absence of explicit regulatory mechanisms (e.g., cost-of-service regulation or price cap regulation). Formal modeling and numerical simulations reveal how regulatory contestability interacts with cost-reducing effort to limit the pass-through of costs. This may suggest that under certain conditions regulatory contestability can substitute for explicit regulatory mechanisms and potentially reduce the cost of regulation.