Price caps and the error in X-factor calculations

Calculation of the X-factor used for price caps has a fundamental flaw when it is based on conventional growth accounting total factor productivity analysis. This error is discussed and the appropriate corrective action is indicated. In an example based on the X-factor used for determining the change in the price for local exchange carriers’ interstate access service in the United States, it is shown that the appropriate X-factor is about 25 percent greater than that based on conventional growth accounting total factor productivity analysis. Published by Elsevier Science B.V.