Price-cap regulation (PCR) provides strong incentives for innovation and cost reductions when ________.

• regulators benchmark costs by looking at similar firms in other geographic jurisdictions
• regulated firms are better informed about current and future industry conditions than the regulators
• regulators set prices based on expected changes in firm productivity rather than realized changes
• regulators set prices based on realized changes in firm productivity rather than expected changes

Please explain why your chosen answer is correct.