Appropriate mechanism design, regulations, and wages

Abstract

Although economic regulation is ubiquitous, little is known about the impact of different regulatory schemes, and changes in these schemes, on wages. The article evaluates the impact of changes in price regulation on average employee wages among the United States local exchange telecommunications companies using contemporary historical data between 1988 and 2001. Two primary approaches in price regulation have been the rate of return and price cap regulation schemes, with the latter assumed to possess important incentive properties. The results establish that firms regulated via rate of return or other hybrid regulatory approaches have paid significantly lower wages. These wages have been, on average, 5–10% lower than what firms regulated via price cap regulation have paid their employees. These results signify the importance of regulations possessing requisite incentive properties and of appropriate regulatory mechanism design in enhancing employees’ real wages in regulated firms.