network regulation and regulatory institutional reform revisiting the case of australia it is well understood that the success of liberalizing the electricity supply industry depends crucially on the quality and design of the regulatory and institutional framework this paper analyses the regulatory arrangements that underpin the work of the australian energy regulator aer these arrangements are contrasted with the regulatory structure of electricity provision in norway a key difference between the reform processes in the two countries relates to the lack of privatization in norway and the co existence of private and publicly owned generators and distributors in australia this comparative analysis allows us to make several recommendations to improve regulatory arrangements in australia these include greater independence for the aer better coordination among regulatory institutions greater use of benchmarking analysis greater customer involvement and improving market transparency and privatization of government owned corporations however the success of privatization will hinge upon the effectiveness of the regulatory environment

the effects of ownership and benchmark competition an empirical analysis of u s water systems abstract should governments or private firms own water systems can yardstick or benchmark competition effectively discipline utilities little empirical research sheds light on these issues we use a panel dataset that includes every community water system in the united states from 1997 to 2003 to test the effects of ownership and benchmark competition on regulatory compliance we find that ownership does not generally affect compliance with the safe drinking water act sdwa greater benchmark competition however is associated with fewer sdwa violations the results suggest that ownership per se may not matter much but that competition even in its weaker form of benchmarking by consumers or regulators can improve performance

information competition and markets one of the dominant characteristics of modern capitalist economies is the important role played by competition not the peculiar static form of pure price competition embodied in the arrow debreu model but rather a dynamic competition more akin to the kind of competition represented by sports contests and other races including patent races in recent years there have been several attempts to explain why firms often base the pay of their workers and managers on relative performance see for example edward lazear and sherwin rosen 1981 such compensation schemes become desirable when three conditions are satisfied a the input effort of workers managers must not be directly observable at least without cost thus firms must either expend resources to monitor inputs or devise reward structures in which compensation is a function of variables such as output or profits which are themselves functions of inputs but are less costly to observe b the relationship between input and output must be stochastic so that by observing output one cannot perfectly infer what the input was c finally the stochastic disturbances which affect the relationship between input and output of different firms must be correlated by looking at the performance of one worker relative to that of others one can make better inferences about his effort than one can make without using this information not only can competition provide a basis of comparison which enables the design of reward structures that can simultaneously provide a high level of incentives with relatively low level risk but compensation schemes based on relative performance have the further advantage of automatically adjusting incentives to changes in the economic environment we refer to this as built in flexibility in a first best world with perfect information concerning the nature of the technology but where it is still costly to monitor individuals activities the compensation scheme would vary from time to time as the environment changed such changes in the compensation scheme are costly to implement and the information required to do so is seldom available when a task is easier the individual s rewards for performing the task should be reduced if pay is based on relative performance although all individuals perform better when they exert the same level of effort their compensation is automatically adjusted thus teachers frequently grade on the curve and a significant fraction of the pay of successful salesmen often consists of bonuses based on relative performance

performance comparisons and dynamic incentives it is well known that comparative performance information cpi can enhance efficiency in static principal agent relationships by improving the trade off between insurance and incentives in the design of explicit contracts in dynamic settings however there may be implicit as well as explicit incentives for example managerial career concerns and the ratchet effect in regulation we show that the dynamic effects of cpi on implicit incentives can either reinforce or oppose the familiar static insurance effect and in either case can be more important for efficiency the overall welfare effects of cpi are thus ambiguous and can be characterized in terms of the underlying information structure

bargaining and waning commitments this paper presents a non cooperative two agent two period complete information bargaining model that introduces gradual concession as observed for example in labor negotiations the capacity of concession may affect the agents payoffs in a non monotonic way since its change may cause the timing of agreement to change d 2006 elsevier b v all rights reserved

alternative regulatory methods and firm efficiency stochastic frontier evidence from the u s electricity industry the use of incentive regulation and other alternative regulatory programs in u s electricity markets has grown during the past two decades within a stochastic frontier framework i investigate the effect of individual programs on the technical efficiency of a large set of coal and natural gas generation units i find that those programs tied directly to generator performance and those that modify traditional fuel cost pass through programs to provide a greater incentive to reduce fuel costs are associated with greater efficiency levels other programs have no statistical association with efficiency levels

separation of powers and development abstract we model separation of powers as an instrument against corruption more specifically as a way to decrease the costs of collusion proofness then we show that the value of this institutional design is higher in developing countries unfortunately the same reasons which are behind this higher value also increase the implementation cost of this institution

examining the cost efficiency of chinese hydroelectric companies using a finite mixture model this paper evaluates the operational activities of chinese hydroelectric power companies over the period 2000 2010 using a finite mixture model that controls for unobserved heterogeneity in so doing a stochastic frontier latent class model which allows for the existence of different technologies is adopted to estimate cost frontiers this procedure not only enables us to identify different groups among the hydro power companies analysed but also permits the analysis of their cost efficiency the main result is that three groups are identified in the sample each equipped with different technologies suggesting that distinct business strategies need to be adapted to the characteristics of china s hydro power companies some managerial implications are developed

tariff based incentives for improving coal power plant efficiencies in india improving the efficiency of coal based power plants plays an important role in improving the performance of india s power sector it allows for increased consumer benefits through cost reduction while enhancing energy security and helping reduce local and global pollution through more efficient coal use a focus on supply side efficiency also complements other ongoing efforts on end use efficiency the recent restructuring of the indian electricity sector offers an important route to improving power plant efficiency through regulatory mechanisms that allow for an independent tariff setting process for bulk purchases of electricity from generators current tariffs based on normative benchmarks for performance norms are hobbled by information asymmetry where regulators do not have access to detailed performance data hence we propose a new incentive scheme that gets around the asymmetry problem by setting performance benchmarks based on actual efficiency data rather than on a normative basis the scheme provides direct tariff based incentives for efficiency improvements while benefiting consumers by reducing electricity costs in the long run this proposal might also be useful for regulators in other countries to incorporate similar incentives for efficiency improvement in power generation

biased signaling and yardstick comparisons in a sovereign debt market abstract this paper develops a sovereign debt model in which governments are privately informed about their likelihood of default but can themselves have a biased perception of this likelihood i show that in this setup government borrowing acts as a signal that is only partially informative about fundamental default probabilities and bond prices do not necessarily reflect true credit risk i also show that in a two country version of the model correlations between the two countries induces yardstick comparisons and the borrowing decision of one government affects the bond price received by the other whether the information spillover increases or decreases the distortion created by the bias depends on the extent to which borrowing signals reinforce each other

productivity and efficiency of us gas transmission companies a european regulatory perspective on both sides of the atlantic the regulation of gas transmission networks has undergone major changes since the early 1990s whereas in the us the long standing regime of cost plus regulation was complemented by increasing pipe to pipe competition most european countries moved towards incentive regulation complemented by market integration we study the productivity development of a panel of us interstate companies using data envelopment analysis and malmquist productivity indices results are presented for changes in productivity as well as for several convergence tests the results indicate that taking productivity and convergence as performance indicators regulation has been rather successful in particular during a period where overall demand was flat however we argue that a benchmarking based regulation might have brought about stronger convergence lessons for european regulators are twofold first the us analysis shows that benchmarking of european transmission operators would be possible if data were available second our results suggest that in the long run market integration and competition are alternatives to the current european model

efficiency and environmental factors in the us electricity transmission industry the electricity industry in most developed countries has been restructured over recent decades with the aim of improving both service quality and firm performance regulated segments e g transmission still provide the infrastructure for the competitive segments and represent a significant share of the total price paid by final customers however there is a lack of empirical studies that analyse firms performance in the electricity transmission sector in this paper an empirical analysis of us electricity transmission companies is conducted for the period 2001 2009 we use alternative stochastic frontier models that allow us to identify the determinants of firms inefficiency these models also permit us to control for weather conditions potentially one of the most decisive uncontrollable factors in electricity transmission our results suggest that weather conditions clearly have an influence on transmission costs and that there is room for improvement in the management of us electricity transmission systems regulators should also be aware that more adverse conditions generate higher levels of inefficiency and that achieving long term efficiency improvements tends to worsen firms short term relative performance

x inefficiency competition and market information whether competition forces firms toward efficient behaviour is an open question we consider a duopoly with firms run by managers and affected by adverse selection on costs in contrast to recent literature we point out that to have a genuine effect on firm x inefficiency competition must change managerial incentives by introducing the availability of some signal on the rivals behaviour we show that if costs are correlated the contractual use of that signal can render private managerial information uninfluential this result stresses the informational role of the market and suggests scope for future work

board composition and nonprofit conduct evidence from hospitals abstract this study uses data from hospitals to test the hypothesis that management representation on nonprofit boards leads to excessive ceo pay defined as compensation that exceeds the level predicted by a market wage model we document a relatively small but statistically significant positive association between ceo pay and insider boards that include the ceo and other employees as members additional tests confirm that this result is not driven by endogenous board structure and that excess pay is greater in the absence of competition from for profit hospitals we then examine whether management board representation is associated with larger underlying agency concerns that lead to reduced donations our tests do not support this hypothesis but do however reveal a negative correlation between donations and physician representation on the board suggesting a potential conflict between the interests of donors and non employee physicians our overall evidence provides empirical support for modeling nonprofit organizations as consisting of competing stakeholders

dynamic yardstick mechanisms abstract this paper shows that the inability of principals to commit to long term contracts is irrelevant when dealing with several agents whose private information is correlated this sharply contrasts with the dynamics of contracting without such correlation the paper also explores what limitations on yardstick mechanisms can justify the use of long term contracts we found that the inability of a principal to commit not to renegotiate long term contracts is without consequence even if there is a bound on transfers that an agent can be asked to pay in contrast short term contracting fails to implement the commitment solution with constraints on transfers second absent current yardstick the possibility of using correlated mechanisms in the future allows the principal to implement the first best with a renegotiation proof long term contract whereas this cannot be achieved with short term contracting

how acquisitions affect firm behavior and performance evidence from the dialysis industry many industries have become increasingly concentrated through mergers and acquisitions which in health care may have important consequences for spending and outcomes using a rich panel of medicare claims data for nearly one million dialysis patients we advance the literature on the effects of mergers and acquisitions by studying the precise ways providers change their behavior following an acquisition we base our empirical analysis on more than 1 200 acquisitions of independent dialysis facilities by large chains over a 12 year period and find that chains transfer several prominent strategies to the facilities they acquire most notably acquired facilities converge to the behavior of their new parent companies by increasing patients doses of highly reimbursed drugs replacing high skill nurses with less skilled technicians and waitlisting fewer patients for kidney transplants we then show that patients fare worse as a result of these changes outcomes such as hospitalizations and mortality deteriorate with our long panel allowing us to identify these effects from within facility or within patient variation around the acquisitions because overall medicare spending increases at acquired facilities mostly as a result of higher drug reimbursements this decline in quality corresponds to a decline in value for payers we conclude the article by considering the channels through which acquisitions produce such large changes in provider behavior and outcomes finding that increased market power cannot explain the decline in quality rather the adoption of the acquiring firm s strategies and practices drives our main results with greater economies of scale for drug purchasing responsible for more than half of the change in profits following an acquisition

the low cost of quality improvements in the electricity distribution sector of brazil abstract we analyze the impact of introducing output based incentives in the price cap regulatory regime of the brazilian electricity distribution sector we focus on the trade off between operating costs and quality improvement hypothesizing a positive relationship operating costs include maintenance and repair expenses the regulator sets limits for service continuity and non technical energy losses in each regulatory period service continuity refers to the average length of interruptions in electricity distribution non technical losses refer to losses due to factors specific to the distribution segment quality incentives include peer pressure and penalties rewards for compliance with minimum quality standards we model operating costs using a gmm framework to acknowledge endogeneity of variables the model is dynamic given the inclusion of regulatory lags to recognize past cost behavior findings reveal a small trade off between costs and quality we conclude that quality improvements are not costly relative to the potential savings from complying with quality standards we also find that the impact on operating costs is larger when energy losses increase compared to the cost effect due to increases in duration of outages these findings suggest areas of attention in managerial decision making and serve as valuable information to the regulator in tailoring quality incentives for this sector

economies of scale in norwegian electricity distribution a quantile regression approach in this article we investigate scale economies in norwegian electricity distribution companies using a quantile regression approach to the best of our knowledge this is the first attempt to apply this estimation technique when analysing scale economies we estimate the cost elasticities of the two output components network length and number of customers to calculate returns to scale our results show large potential of scale economies particularly for the smallest companies we also find that returns to scale is increasing over time these findings have important implications for policymakers when they are deciding the structure of the industry in the future

multiproduct technology and market structure a recent line of research has exposed some technological determinants of the structure of industries that produce more than one good the analyses of both multiproduct perfect competition and natural monopoly require a generalized notion of average cost and in addition several newly identified technological characteristics pertinent only to joint production this paper provides an overview of these new results and suggests a unifying framework in which the theory can be further developed

incentive mechanisms for environmental protection under asymmetric information a case study the purpose of this paper is to compare the performance of some instruments of environmental policy using data for a coal fired power plant each decentralized scheme coverages towards the social optimum chosen by a regulator we look at the performance of a changing tax rate on emission of an announcement of the tax formula of an announcement of the tax formula with a tax refund possibility and of a tax cum subsidy scheme our emphasis is on full information concerning the tax and subsidy formulas and on the opportunity for the firm to optimize intertemporally we also test two performance schemes which combine social optimal pricing with optimal abatement decisions our interest is to compare the speed of convergence of the schemes the monetary side payments subsidy bonus required and to look for self financing schemes

how do hospitals respond to price changes this paper examines hospital responses to changes in diagnosis specific prices by exploiting a 1988 policy reform that generated large price changes for 43 percent of medicare admissions i find hospitals responded primarily by upcoding patients to diagnosis codes with the largest price increases this response was particularly strong among for profit hospitals i find little evidence hospitals increased the volume of admissions differentially for diagnoses subject to the largest price increases despite the financial incentive to do so neither did they increase intensity or quality of care in these diagnoses suggesting hospitals do not compete for patients at the diagnosis level

incentive plans for productive efficiency innovation and learning in many industries where production or sales is delegated to a number of subunits the central management faces the classical problem how to induce continuous efficiency improvements organizational learning and transfer of knowledge with a minimum of control exercised this paper draws on recent results regarding regulatory frameworks to construct simple yet powerful incentive schemes for decentralized production under asymmetric information the theoretical foundation is based on principal agent theory cf laffont and tirole econometrica 56 1986 614 641 and extensions to production theory by bogetoft management science 40 1994 959 968 the proposed incentive system is operational and makes use of available information to provide positive incentives for participation in the dynamic development of the entire organization

paying for efficiency incentivising same day discharges in the english nhs we study a pay for efficiency scheme that encourages hospitals to admit and discharge patients on the same calendar day when clinically appropriate since 2010 hospitals in the english nhs are incentivised by a higher price for patients treated as same day discharge than for overnight stays despite the former being less costly we analyse administrative data for patients treated during 2006 2014 for 191 conditions for which same day discharge is clinically appropriate of which 32 are incentivised using difference in difference and synthetic control methods we find that the policy had generally a positive impact with a statistically significant effect in 14 out of the 32 conditions the median elasticity is 0 24 for planned and 0 01 for emergency conditions condition specific design features explain some but not all of the differential responses

do managers work harder in competitive industries abstract we analyze the relationship between product market competition and managerial effort in a linear principal agent model firms compete in a differentiated cournot oligopoly we use two competition indexes the degree of product differentiation and the number of firms an increase in competition stemming from a lower degree of product differentiation reduces the optimal level of effort while an increase in competition from more firms has an ambiguous effect an increase in the number of firms reduces increases effort when the degree of product differentiation is low high

simultaneous offers and the inefficiency of bargaining a two period example abstract it is shown that the pareto optimal outcomes in a two period simultaneous move bargaining model violate forwards induction rationality when the players are sufficiently patient this bargaining model describes a situation where a principal is represented by an agent whose flexibility is restricted hence a bargaining process with such agents can create costly delays the result also provides another example of the power of forwards induction and stability

bargaining with imperfect commitment abstract we study the effect of imperfect commitment in noncooperative two person bargaining games by establishing the reputation for being stubborn a player sometimes commits to her initial demand becoming unable to change her demands or to accept an inferior offer from her opponent when the probability of being stubborn is small the set of equilibria is shown to be small and agreement may be reached immediately despite the possibility of stubbornness a player has greater bargaining power when she is more patient and or is more likely to be stubborn journal of economic literature classification number c78

efficiency effects of observed and unobserved heterogeneity evidence from norwegian electricity distribution networks abstract since the 1990s efficiency and benchmarking analysis has increasingly been used in network utilities research and regulation a recurrent concern is the effect of observable environmental factors that are beyond the influence of firms and unobserved factors that are not identifiable on measured cost and quality performance of firms this paper analyses the effect of observed geographic and weather factors and unobserved heterogeneity on a set of 128 norwegian electricity distribution utilities for the 2001 2004 period we utilise data on 78 geographic and weather variables to identify real economic inefficiency while controlling for observed and unobserved heterogeneity we use the factor analysis technique to reduce the number of environmental factors into few composite variables and to avoid the problem of multicollinearity in order to identify firm specific inefficiency we then estimate a pooled version of the established stochastic frontier model of aigner et al 1977 and the recent true random effects model of greene 2004 2005a b without and with environmental variables the results indicate that the observed environmental factors have a rather limited influence on the utilities average efficiency and the efficiency rankings moreover the difference between the average efficiency scores and the efficiency rankings among the pooled and the true random effects models imply that the type of sfa model used is highly influencing the efficiency estimates

the price ain t right hospital prices and health spending on the privately insured we use insurance claims data for 27 6 percent of individuals with private employer sponsored insurance in the us between 2007 and 2011 to examine the variation in health spending and in hospitals transaction prices we document the variation in hospital prices within and across geographic areas examine how hospital prices influence the variation in health spending on the privately insured and analyze the factors associated with hospital price variation four key findings emerge first health care spending per privately insured beneficiary varies by a factor of three across the 306 hospital referral regions hrrs in the us moreover the correlation between total spending per privately insured beneficiary and total spending per medicare beneficiary across hrrs is only 0 14 second variation in providers transaction prices across hrrs is the primary driver of spending variation for the privately insured whereas variation in the quantity of care provided across hrrs is the primary driver of medicare spending variation consequently extrapolating lessons on health spending from medicare to the privately insured must be done with caution third we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures for example hospital prices for lower limb mris vary by a factor of twelve across the nation and on average two fold within hrrs finally hospital prices are positively associated with indicators of hospital market power even after conditioning on many demand and cost factors hospital prices in monopoly markets are 15 3 percent higher than those in markets with four or more hospitals

revocable commitment and sequential bargaining in this paper the author presents a noncompetitive bargaining model which unifies the two well known but distinct bargaining games due to j nash 1953 and a rubinstein 1982 moreover the author explores the robustness of the equilibrium set of these two bargaining games to a particular kind of perturbation in the commitment structure of the underlying extensive forms from a different perspective and interpretation of the model the author examines and studies the relationship between the equilibrium commitment levels and the costs to the bargainers of revoking their respective commitments copyright 1992 by royal economic society

privatization technical efficiency and welfare consequences the case of the cote d ivoire electricity company cie abstract in 1990 cote d ivoire privatized the management of its electric power company lease contracting in this paper we are interested in identifying the economic effect of this institutional change by estimating a stochastic production frontier we have found that productive efficiency improved after privatization thanks to organizational innovations total factor productivity gains have been closely associated with a cost reduction strategy the way these gains have been distributed in a monopoly context suggests that consumers have been the main beneficiaries through a significant decrease of the relative price of electricity

a bargaining model based on the commitment tactic abstract this paper studies a one shot simultaneous move bargaining game each bargainer makes a partial commitment a share of the unit size cake that she would like to get which can later be revoked at some cost to the player the payoffs are defined in part by the nash bargaining solution where the feasible utility set is affected by the players partial commitments under certain assumptions on the two cost of revoking functions we establish that the model has a unique nash equilibrium it is shown that a player s equilibrium share of the cake is strictly increasing in her marginal cost of revoking a partial commitment an application of our model selects a unique equilibrium in nash s demand game journal of economic literature classification number c78

revisiting support policies for res e adulthood towards market compatible schemes abstract the past two decades of growth in renewable energy sources of electricity res e have been largely driven by out of market support policies these schemes were designed to drive deployment on the basis of specific subsidies sustained in time to allow for the larger costs as well as to limit investor risk while these policies have proven to be effective the way they have been designed to date has led to costly market distortions that are becoming more difficult to ignore as penetrations reach unpreceded levels in the context of this growing concern we provide a critical analysis of the design elements of res e support schemes focusing on how they affect this trade off between promoting and efficiently integrating res e the emphasis is on the structure of the incentive payment which in the end turns to be the cornerstone for an efficient integration we conclude that while needed a well designed and further developed capacity based support mechanism complemented with ex post compensations defined for reference benchmark plants such as the mechanism currently implemented in spain is an alternative with good properties if the major goal is truly market integration the approach is robust to future developments in technology cost performance and market penetration of res e

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

delay in multilateral bargaining under complete information abstract this paper analyzes a complete information infinite horizon multilateral bargaining model in which one player bargains with each of the other players one at a time and binding cash offer contracts are used to govern transactions under a weak stationarity condition on equilibrium strategies we characterize the set of equilibria for the game we show that when players are sufficiently patient significant delay in reaching agreements may emerge and this delay can become longer quickly as the number of involved parties rises indeed when the number of bargainers is large perpetual disagreement can occur in equilibrium journal of economic literature classification numbers c78 d23 d62

effort rewarding incentive mechanisms for public enterprise managers abstract management incentive schemes leading to welfare optimal pricing and efficient production of public enterprises have so far been mainly concerned with the information advantages that public enterprise managers hold over their supervising government or central planning agency managers under these schemes are induced to improve their firm s performance in adjustment processes which in the limit lead to optimal firm decisions such managers are supposed to be income maximizers disregarding any personal effort which could influence their performance and utility in this paper i show that two incentive schemes recently proposed by tam 1981 and finsinger and vogelsang 1982 can also help to induce managers to provide an optimal level of effort here effort is assumed to reduce managers utility and the firm s costs the result depends crucially on myopic managerial utility maximization once managers maximize the discounted value of future utility levels they will deviate from the optimal behavior under tam s scheme this can hold independent of the optimal effort level under the finsinger vogelsang performance index managers will always show suboptimal effort levels in a steady state equilibrium because the index only rewards welfare improvements effort however has to be rewarded even with no improvement in behavior an improved performance index which provides cumulative rewards is shown to be strategy proof and lead to a welfare optimum this reward structure basically treats managers as if they were private entrepreneurs it looks extremely generous in that it gives managers the fruits of all costs reductions due to increases in effort suggestions are made to mitigate this income distributional impact

vertical contracting with informational opportunism we consider vertical contracting arrangements between a manufacturer and a retailing network when retailers have private information and the organization is run through bilateral contracts we highlight a new form of informational opportunism arising when the manufacturer manipulates information learned separately in each relationship we characterize the set of allocations robust to such opportunism by means of simple ex post incentive compatibility constraints those constraints limit the manufacturer s ability to use yardstick competition among retailers they simplify contracts and restore a rent efficiency trade off even with correlated information we show that sell out contracts are optimal under a wide range of circumstances

credit rationing as a temporary suboptimal equilibrium with imperfect information abstract jaffee and russell 1976 characterized partial rationing as a contract rate and contract size below those of the no rationing equilibrium their non price rationing here obtains as a suboptimal equilibrium for a risk averse rate setting intermediary with marginal increasing cost and a monopolistically competitive loan demand the temporary dis equilibrium corresponds to a dominated strategy and the wider class of models of which j r s solution is but a singular case is touched upon

paying for observable luck this article examines why ceos are rewarded for luck namely for observable shocks beyond their control i propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy after signing the contract but before acting the agent observes a signal on future luck implicit incentives are weaker after good news and call for higher pay for performance sensitivity in good times as a result managerial pay is tied to luck the model is also consistent with recent evidence of asymmetric pay for luck that is a larger exposure of managerial pay to good luck than to bad

decentralizing development allocating public goods via competition abstract decentralizing the allocation of public goods by giving funds directly to communities takes advantage of local information concerning needs but leaves funds open to misuse or capture by local elites a large scale development project in indonesia attempts to overcome this downside of decentralized allocation by having communities compete locally for block grants competition weeds out less efficient projects increasing the number of villages bidding by 10 leads to a 1 8 decline in road construction costs increased community participation in project planning also leads to better outcomes

regulation competition and asymmetric information abstract this article studies a model of regulation under asymmetric information when there exists a competitive fringe of unregulated alternative producers the correlation between the unknown cost parameters of the fringe and of the regulated firm allows the regulator to use the threat of entry by the fringe to reduce the informational cost of regulation the presence of the fringe is welfare enhancing the allocative distortions can be larger or smaller than those in the no fringe case and the optimal contract sometimes allows inefficient entry the optimal contract can exhibit non standard bunching phenomena and discontinuities

efficient regulation with little information reality in the limit we present a regulatory scheme that converges to ramsey pricing and productive efficiency even if regulators have little information about technology or demand the model has firms selecting prices subject to the regulator s requirement that the firm earn a fair return on capital at today s capital stock and output levels regulators then review later performance and are more likely to request new rate hearings as the firm s return deviates more from the fair return as long as regulators do not review negative returns too fast relative to positive returns these conditions are sufficient for convergence to ramsey prices and productive efficiency public utility regulators generally set prices not rates of return per se these prices however often are meant to achieve approximately some target rate of return but when projecting how prices will affect rates of return regulators are often at the mercy of the firms for economic projections about the effects of various price vectors e g across customer classes upon profits so if realized rates of return deviate from targets regulators may call new rate hearings and they may expedite these hearings if the deviations are large 2 by formalizing these real world observations some rather surprising efficiency results appear suppose that regulators have no knowledge of demands and technologies but can observe past realizations of prices and quantities if the review probabilities are as noted above and satisfy an asymmetry condition then this regulatory process may converge not only to productive efficiency overcoming averch johnson over capitalization effects but to ramsey prices these conclusions are derived from unifying and extending work by bawa and sibley 1980 and vogelsang and finsinger 1979

what is the best practice for benchmark regulation of electricity distribution comparison of dea sfa and stoned methods electricity distribution is a natural local monopoly in many countries the regulators of this sector apply frontier methods such as data envelopment analysis dea or stochastic frontier analysis sfa to estimate the efficient cost of operation in finland a new stoned method was adopted in 2012 this paper compares dea sfa and stoned in the context of regulating electricity distribution using data from finland we compare the impacts of methodological choices on cost efficiency estimates and acceptable cost while the efficiency estimates are highly correlated the cost targets reveal major differences in addition we examine performance of the methods by monte carlo simulations we calibrate the data generation process dgp to closely match the empirical data and the model specification of the regulator we find that the stoned estimator yields a root mean squared error rmse of 4 with the sample size 100 precision improves as the sample size increases the dea estimator yields an rmse of approximately 10 but performance deteriorates as the sample size increases the sfa estimator has an rmse of 144 the poor performance of sfa is due to the wrong functional form and multicollinearity

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

inefficiency persistence and heterogeneity in colombian electricity utilities abstract the electricity reform in colombia has exhibited gains in terms of reliability but its effects on firm efficiency and service quality have not been clear previous studies evaluating the performance of distribution companies after the reform have not found evidence of improvements although large differences in efficiency have been found among firms this suggests high inefficiency persistence and heterogeneity in the colombian distribution sector in this paper we propose an extension of dynamic stochastic frontier models that accounts for unobserved heterogeneity in the inefficiency persistence and in the technology the model incorporates total expenses service quality and energy losses in an efficiency analysis of colombian distributors over fifteen years after the reform we identify the presence of high inefficiency persistence in the sector and important differences between firms in particular rural companies and firms with small customers present low persistence and evidence the largest gains in efficiency during the period however increases in efficiency are only manifested during thelast five years when the main improvements in service quality and energy losses are presented overall inefficiency persistence customer density and consumption density are found to be important criteria to be considered for regulatory purposes

efficiency gains in danish district heating is there anything to learn from benchmarking abstract facing a market structure of independent heating systems and cost of service regulation the regulator considers ways to create incentives for increasing efficiency in heat production one way is to implement benchmark regulation the aim of this paper is twofold 1 to investigate the potential for increasing productivity in danish district heating production and 2 to examine whether benchmarking has a role to play using data envelopment analysis our analyses show that by assuming variable returns to scale a potential exists to reduce production costs by 5 27 depending on the portfolio of inputs and outputs included in the model further our analyses show that the ranking of producers is much dependent on the combination of inputs and outputs included in the model therefore great care should be taken when deciding on the appropriate model to be used when implementing benchmarking as a regulatory mean

transferable quotas enforcement costs and typical firms an empirical application to the norwegian trawler fleet an alternative to traditional regulations of fisheries to avoid rent dissipation is the use of individual transferable quotas itqs where prices in the quota market provide the necessary information to owners of harvest rights to contract with each other however even under such a decentralized regime information on the underlying technology of the fishing vessels is also necessary first since most fisheries consist of many interrelated production processes in order to avoid rent dissipation by discarding wrong output mix etc the structure of production in the multispecies fishery must be known to design a proper quota system second an itq system may create incentives for misreporting by understating the actual catch this may especially be the case where the expected degree of self enforcement is low the paper proposes a way to reduce the information requirements under regulation with asymmetric information by constructing a typical firm and comparing performance for the other vessels to this firm based on the typical firm and if the industry is relatively homogenous the performance and hence catch of any other firm in the industry can be predicted within a certain range further the paper applies this idea to the norwegian trawler fleet to assess the production structure in terms of jointness input output separability and the supply and demand elasticities for the fishing firms this information characterizes the fishery and thus how the quota system may be designed and how to construct a yardstick in order to reduce the enforcement cost under a decentralized regulation of itqs

estimation of cost effectiveness of the finnish electricity distribution utilities abstract this paper examines the cost effectiveness of finnish electricity distribution utilities we estimate several panel data stochastic frontier specifications using both cobb douglas and translog model specifications the conventional models are extended in order to model observed heterogeneity explicitly in the cost frontier models the true fixed effects model has been used as a representative of the models which account for unobserved heterogeneity and extended conventional random effect models have been used in analysing the impact of observed heterogeneity a comparison between the conventional random effects model and models where heterogeneity component is entered either into the mean or into the variance of the inefficiency term shows that relative efficiency scores diminish when heterogeneity is added to the analysis the true fixed effects model on the other hand gives clearly smaller inefficiency scores than random effects models in the paper we also show that the relative inefficiency scores and rankings are not sensitive to the cost function specification our analysis points out the importance of the efficient use of the existing distribution network the economies of scale results suggest that firms could reduce their operating costs by using networks more efficiently according to our results average size firms which have high load factors are the most efficient ones all firms have unused capacities so that they can improve cost effectiveness rather by increasing the average distributed volumes than by mergers

specification of merger gains in the norwegian electricity distribution industry electricity distribution often exhibits economies of scale in norway a number of smaller distribution system operators exist and thus there is potential to restructure the industry possibly through mergers however the revenue cap regulatory model in norway does not incentivize firms to merge as merging leads to a stricter revenue cap for the merged company thus the regulator compensates the firms in order to create such incentives the amount of compensation is based on the potential gains of the merger estimated using a data envelopment analysis dea based frontier approach introduced by bogetoft and wang journal of productivity analysis 23 145 171 2005 dea is however only one of many possible frontier estimators that can be used in estimation furthermore the returns to scale assumption the operating environment of firms and the presence of stochastic noise and outlier observations are all known to affect to the estimation of production technology in this paper we explore how varying assumption under two alternate frontier estimators shape the distribution of merger gains within the norwegian distribution industry our results reveal that the restructuring policies of the industry may be significantly altered depending how potential gains from the mergers are estimated

regulatory restructuring and incumbent price dynamics the case of u s local telephone markets prior to the telecommunications act of 1996 many u s states restructured their regulatory framework by replacing rate of return regulation with competition in both the local exchange service and local long distance markets and adopting price regulation price caps and price freezes using a panel data set of incumbent firm prices for three services i investigate whether price regulation and differences in entry conditions affect incumbent operators rate structures i find that competition has prompted a significant amount of rate rebalancing by reducing the amount of cross subsidization present in local telephone markets in addition the added flexibility of price cap regulation speeds the rate rebalance effects of competition

regional differences in electricity distribution costs and their consequences for yardstick regulation of access prices abstract in this paper we estimate an average cost function for a panel of 59 swiss local and regional electricity distribution utilities as a basis for yardstick regulation of the distribution network access prices shleifer 1985 proposed yardstick competition in terms of price to regulate local monopolies producing a homogeneous good the regulated price for the individual firms depends on the average costs of identical firms the yardstick competition concept can also be applied to firms that produce heterogeneous goods if these goods differ only in observable characteristics to correct the yardstick for heterogeneity the regulator can use a multivariate estimation of an average cost function in the case of electricity distribution the heterogeneity of output consists mainly of different characteristics of the distribution service areas in this paper we follow shleifer s suggestion to estimate a multivariate average cost function that can be employed by the regulatory commission to benchmark network access prices at the distribution level several exogenous variables measuring the heterogeneity of the service areas were included in the cost model specification we find that the regional differences of the service areas e g area shares of forests agricultural areas or unproductive land and population density significantly influence electricity distribution costs

risk pooling and intermediate trading agents this paper argues that intermediate trading agents itas besides providing services like the service of availability and information economizing activity serve another important role which is to provide producing firms with a vehicle to shift forward their retailing risks of unsold products the gains from trade from intermediation as risk bearers need not beg arbitrary assumptions that itas compared to firms must have better information regarding consumer demands or less costly retailing technologies neither does it necessarily rely on the assumption that itas are inherently less risk averse rather risk pooling via product diversification by itas under plausible conditions is sufficient to provide the profit incentive for intermediation for such insurance service producing firms pay risk premia embedded in price discounts which increase or decrease with bulk orders of itas depending on whether firms have increasing or decreasing returns to scale production technologies respectively la mise en commun des risques et les intermediaires commerciaux ce memoire sugg re que les interm6diaires commerciaux en plus de produire des services de disponibilite et une activite qui reduit les coats de l information peuvent aussi constituer un moyen pour les entreprises productrices de transferer les risques de produits invendus vers leur client le ou leurs agents pour que les intermediaires commerciaux jouent ce role et que des gains soient engendr6s par cette activite d interm6diation il n est pas n6cessaire de postuler que les intermediaires ont des renseignements plus clairs quant a la demande des consommateurs ou qu ils ont acc s a des technologies de mise en march6 moins cofiteuses ou que ces intermediaires ont moins de repugnance pour le risque il suffit que les intermediaires puissent esperer faire des profits par ces operations d intermediation en mettant en commun certains risques par une diversification de leurs activit6s pour obtenir cette sorte de service d assurance les entreprises productrices vont etre pretes h consentir des escomptes de prix qui vont croitre ou d6croitre a proportion que les commandes des intermediaires commerciaux prennent des dimensions plus importantes selon que les entreprises productrices ont des technologies dont les rendements h l echelle sont croissants ou decroissants the author is grateful to joel fried and john palmer for useful comments and discussions many thanks are also due to keizo nagatani and the anonymous referees for helpful suggestions to improve on an earlier version canadian journal of economics revue canadienne d economique xiv no 2 may mai 1981 printed in canada imprime au canada 0008 4085 81 0000 0261 01 50 1981 canadian economics association this content downloaded from 157 55 39 208 on fri 29 jul 2016 04 21 50 utc all use subject to http about jstor org terms

quality frontier of electricity distribution supply security best practices and underground cabling in finland electricity distribution is a prime example of local monopoly in most countries the costs of electricity distribution operators are regulated by the government however the cost regulation may create adverse incentives to compromise the quality of service to avoid this cost regulation is often amended with quality incentives this study applies theory and methods of productivity analysis to model the frontier of service quality a semi nonparametric estimation method is developed which does not assume any particular functional form for the quality frontier but can accommodate stochastic noise and heteroscedasticity the empirical part of our paper examines how underground cabling and location affect the interruption costs as expected higher proportion of underground cabling decreases the level of interruption costs the effects of cabling and location on the variance of performance are also considered especially the location is found to be a significant source of heteroscedasticity in the interruption costs finally the proposed quality frontier benchmark is compared to the current practice of finnish regulation system the proposed quality frontier is found to provide more meaningful and stable basis for setting quality targets than the average practice benchmarks currently in use

deadline effects and inefficient delay in bargaining with endogenous commitment abstract bilateral sequential negotiators delay agreements until a deadline if a player that rejects an offer is subsequently committed not to accept any poorer proposal and if the common discount factor is close enough to one journal of economic literature classification numbers c7 c78 j52

frontier estimation how useful a tool for health economics the journal is pleased to publish in this issue three papers that apply frontier estimation techniques to hospitals and nursing homes together with an exchange over the usefulness of those techniques in the health care context the papers represent the current state of the art with respect to applications of frontier estimation in health care because of the growing popularity of the technique no doubt in part from its availability in standard software packages it seems useful to take this opportunity to appraise its usefulness one might begin by asking usefulness for what assuming one could define a frontier with certainty how would one use such knowledge a straightforward application in health care appears to be to reimbursement because both data envelopment analysis dea and stochastic frontier estimation specify the least cost mix of inputs for a given output both methods can in principle be used to determine whether a given firm hospital or nursing home is efficient and if the answer to that question is no the magnitude of any inefficiency it is not a large step from that information to the notion that a regulator should reduce the firm s budget by the amount of the measured inefficiency indeed vitaliano and toren mention the boren amendment s requirement that the medicaid program reimburse hospitals and nursing homes at the cost incurred by an efficiently operated

relative performance evaluation of the english acute hospital sector relative performance evaluation has been suggested as a means to overcome information asymmetry between regulators and organizations when assessing efficiency by comparing similar organizations the relationship between costs and effort can be better isolated the english department of health doh has undertaken relative performance evaluation in comparing the unit costs of acute hospitals using ordinary least squares ols methods after adjusting for exogenous influences in costs residual unexplained cost differences are deemed to represent inefficiency this paper questions the official interpretation of the ols residuals the ols model is re estimated to calculate confidence intervals around the residuals and as a stochastic cost frontier scf it is concluded that english acute hospitals exhibit less in efficiency than is implied by official estimates

m form hierarchy with poorly diversified divisions a case of khrushchev s reform in soviet russia we test the premise of the theoretical literature that m form political hierarchies are effective in creating yardstick competition between regional divisions only when those divisions have sufficiently diversified or similar industrial composition the reason for this is that the competition among poorly diversified inter related divisions creates incentives for regional leaders to pursue policies that inhibit industrial growth in neighboring regions in order to make their own region look better from the point of view of the center we use a unique episode in soviet history when a traditional soviet unitary form u form hierarchy was replaced by a multidivisional form m form organization namely khrushchev s sovnarkhoz reform first we demonstrate that during this reform regional leaders were subjected to relative performance evaluation which created incentives to generate industrial growth second we show that these career concerns resulted in higher growth in regions with sufficiently diversified and therefore self contained economies and lower growth in highly specialized regions

robust optimization policy benchmarks and modeling errors in natural gas abstract the problem of regulating natural gas procurement has become a huge burden to regulators especially due to the plethora of complicated financial contracts that are now being used by local distribution companies ldcs for risk management purposes muthuraman aouam and rardin 2008 proposed a new benchmarking scheme called policy benchmarks and showed that these benchmarks do not suffer from the usual criticisms that are made against existing regulatory methods such policy benchmarks based regulation has however faced hurdles in being adopted one of the primary reasons has been concerns over its robustness we demonstrate in this paper that when modeling errors are present the policy benchmarks proposed earlier can backfire and are hence as suspected not well suited for regulation we begin our analysis with a more general model than the one that has been used earlier by accommodating the ldc s ability to reduce cost by exerting effort as in classical economics we derive solutions to the ldcos problem find closed form solutions for the regulator s optimal fee fraction along with risk sharing implications and provide insights into the policy benchmark selection we then construct a robust optimization based policy benchmarking mechanism that inherits all the original benefits we further demonstrate that these unlike the earlier benchmarks are robust against modeling errors

performance and efficiency in colombia s power distribution system effects of the 1994 reform we assess evolution in performance efficiency and productivity of colombia s power distribution utilities before and after the 1994 regulatory reform that introduced electricity market activities for the power sector in 12 distribution companies from 1985 to 2001 performance is evaluated contrasting changes in mean and median by wilcoxon rank sum and pearson tests on financial and other performance indicators technical efficiency is measured by means of data envelopment analysis dea the nature of the dataset allows the estimation of malmquist productivity index and its evolution in time results show a recovery after the reform in the main performance indicators of profitability partial input productivity and output plant efficiency and productivity increased after the reform mainly in the largest utilities used as benchmarks in the dea efficiency scores measures meanwhile the less efficient power distribution companies did not improved after the reform and were not able to undertake plant restructuring to catch up in plant efficiency with respect to the pareto efficient input allocations econometric results on dea efficiency scores suggest a positive effect of policy reform

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that