Abstract: This paper studies two regulatory means for encouraging technical innovation of enterprises-price cap regulation and optimal regulatory mechanism.Firstly,we establish the two regulatory models and get the corresponding regulatory mechanisms to induce innovation of enterprises.Then the performances of the two regulatory means are compared,which include the internal incentive of the enterprise for innovation and the welfare loss associated with the increase of innovation expenses.Further,we analyze the change of relative advantages between the two regulatory means when the incentive for innovation of enterprises is introduced.

Key words: price cap regulation, optimal regulation mechanism, technical innovation, incentive