smart grid investments regulation and organization worldwide but in particular in north america and europe the grid infrastructure managers are facing demands for reinvestments in new assets with higher on grid and off grid functionality in order to promote energy efficiency and low carbon conversion of the energy sector to meet societal policy objectives in terms of carbon dioxide emissions both the composition of the generators in favor of distributed energy resources der and the load promoting integration with downstream energy useage will change in this paper we chararcterize some of the effects of new asset investments policy on the network tasks assets and costs and contrast this with the assumptions implicit or explicit in current economic network regulation the resulting challenge is identified as the change in the direction of higher asymmetry of information and higher capital intensity combined with ambiguities in terms of task separation to provide guidance we present a model of investment provision under regulation between a distribution system operator dso and a potential investor generation the results from the model confirm the hypothesis that network regulation should find a focal point should integrate externalities in the performance assessment and should avoid wide delegation of contracting billing for smart grid investments

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

the limits of competition housing insurance in switzerland abstract in switzerland there are seven cantons where the housing insurance market is competitive while in the 19 others there are local state monopolies this paper compares the price performance relationship of these different market forms it is shown that for a very similar product the state monopolies charge 70 lower prices that they spend substantially more on fire prevention and that they have much lower damage rates one of the main reasons for the higher prices of the private insurance companies is the fact that they spend considerably more on sales and administrative costs the housing insurance market is thus a classic example of a situation where state monopoly outperforms private sector competition

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

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

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 architecture of economic systems hierarchies and polyarchies the authors present new ways of looking at economic organizations andsystems individuals judgments entail errors they sometimes reject good projects and accept bad projects the architecture of an economicsystem specifying how the decision making units are organized togetherwithin a system who gathers what information and who communicates what with whom affects its performance both because it influences thenature of errors that individuals make within the system and becauseit has a critical effect on the aggregation of individuals errors theperformance of two polar architectures decentralized polyarchical versus centralized hierarchical decision making authorities are analyzed and compared copyright 1986 by american economic association

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

essential facility financing and market structure abstract the paper analyzes the funding of an infrastructure project when an incumbent operator has private information about market profitability and the regulator does not have access to taxpayers money an open access policy raises welfare but may make the project non viable since funding must be provided by operators capital contributions we characterize the optimal market structure the regulator can ask the incumbent to bear a higher share of investment cost if the latter insists on an exclusive use yet the incumbent is willing to pay more for exclusivity the higher the demand that is precisely when competition yields the highest benefits at the optimum the incumbent s information is not used to determine market structure we further investigate the implications of this basic result in a dynamic context we show that the monopoly franchise policy is time consistent while an open access policy is not we also demonstrate that a threat of regulatory capture creates an open access presumption last we show that when the decision involves multiple projects monopoly segments should cross subsidize open access ones

persistent heterogeneity of r d intensities within sectors evidence and policy implications abstract do firms in the same sector converge towards the same r d intensities previous research has often assumed this to be true a closer examination using microdata from the eu industrial r d investment scoreboard for the years 2000 2015 shows considerable heterogeneity in r d intensities among firms in the same sector and that this heterogeneity persists over time statistical tests of convergence show that the variation in r d intensities does not decrease over time i e no convergence although firms with an r d intensity below the industry average do seem to catch up with the leaders i e evidence of convergence overall firms in the same industry do not converge to a common r d intensity policy implications are discussed

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

reference pricing competition and pharmaceutical expenditures theory and evidence from a natural experiment abstract we study the impact of regulation on competition between brand names and generics and pharmaceutical expenditures using a unique policy experiment in norway where reference pricing rp replaced price cap regulation in 2003 for a sub sample of off patent products first we construct a vertical differentiation model to analyze the impact of regulation on prices and market shares of brand names and generics then we exploit a detailed panel data set at product level covering several off patent molecules before and after the policy reform off patent drugs not subject to rp serve as our control group we find that rp significantly reduces both brand name and generic prices and results in significantly lower brand name market shares finally we show that rp has a strong negative effect on average molecule prices suggesting significant cost savings and that patients copayments decrease despite the extra surcharges under rp

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

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

finding the right yardstick regulation of electricity networks under heterogeneous environments abstract revenue cap regulation is often combined with systematic benchmarking to reveal the managerial inefficiencies when regulating natural monopolies one example is the european energy sector where benchmarking is based on actual cost data which are influenced by managerial inefficiency as well as operational heterogeneity this paper demonstrates how a conditional nonparametric method which allows comparison of firms operating under heterogeneous technologies can be used to estimate managerial inefficiency a dataset of 123 distribution firms in norway is used to show aggregate and firm specific effects of conditioning we compare the models presently used by the norwegian regulator to a suggested conditional model thus providing a viable alternative to distinguish between managerial inefficiency and operational heterogeneity the use of the conditional model in this regulatory context leads first to a decrease in aggregate efficient costs and second to a reallocation effect that affects the relative profitability of firms and relative customer prices thus providing a fairer basis for setting revenue caps

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

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

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

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

the changing role of consumers and suppliers in a food safety event the 2006 foodborne illness outbreak linked to spinach abstractthis article provides a means for testing whether buyers or sellers are responsible for a drop in sales following a market shock we show that suppliers responses dominated the market reaction to the 2006 us food and drug administration warning to avoid fresh spinach contaminated with potentially deadly bacteria escherichia coli o157 h7 a modified durbin wu hausman test for temporary price endogeneity is developed and used in a leafy green vegetable demand model test results indicate the price of bagged spinach was exogenous before the announcement but endogenous for approximately 12 weeks afterward we show these results are consistent with the notion that suppliers temporarily limited the availability of spinach to consumers instead of consumers choosing the quantity purchased given exogenous prices it was suppliers who limited the quantity marketed and consumers choices established the market price

the optimal initial allocation of pollution permits a relative performance approach the initial allocation of pollution permits is an important aspect of emissions trading schemes we generalize the analysis of bohringer and lange 2005 eur econ rev 49 8 2041 2055 to initial allocation mechanisms that are based on inter firm relative performance comparisons including grandfathering and auctions as well as novel mechanisms we show that using firms historical output for allocating permits is never optimal in a dynamic permit market setting while using firms historical emissions is optimal only in closed trading systems and only for a narrow class of allocation mechanisms instead it is possible to achieve social optimality by allocating permits based only on an external factor which is independent of output and emissions we then outline sufficient conditions for a socially optimal relative performance mechanism

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

estimating the marginal cost of quality improvements the case of the uk electricity distribution companies the main aim of this paper is to develop an econometric approach to estimation of marginal costs of improving quality of service we implement this methodology by way of applying it to the case of the uk electricity distribution networks the estimated marginal costs allow us to shed light on the effectiveness of the current uk incentive regulation to improve quality and to derive optimal quality levels and welfare losses due to sub optimal quality levels the proposed method also allows us to measure the welfare effect of the observed quality improvements in the uk between 1995 and 2003 our results suggest that while the incentive schemes established by the regulator to encourage utilities to reduce network energy losses leads to improvement in sector performance they do not provide utilities with sufficient incentives to avoid power interruptions we find that the observed improvements in quality during the period of this study only represented 30 of the potential customer welfare gains and hence there was still significant scope for quality improvements

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

road tax interactions among local governments a spatial panel data analysis of the french case over the period 1984 2000 abstractthis article contributes to the literature on local tax interactions its novelty lies in its focus on the interactions of local governments via an indirect local tax on vehicles such as th

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

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

collusion proof yardstick competition abstract this paper analyses the incentives for collusion among firms when an industry is regulated by means of yardstick competition the central assumption is that firms must write collusive side contracts before the revelation of private correlated information and are unable to communicate later the analysis shows that collusion is costly to society only if firms can commit to side payments third best collusion proof yardstick competition entails more less distortion of efficiency for low productivity high productivity firms than second best yardstick competition the benefit of yardstick competition vanishes in the limit as correlation of private information becomes near perfect

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

privatisation and the efficiency of decentralised electricity generation some evidence from inter war britain the privatization of the electricity supply industry in england and wales has established a decentralized system of supply this paper considers the efficiency of the decentralized interwar electricity supply industry a generalized stochastic frontier cost function is specificed enabling the estimation of returns to scale and inefficiency at plant level these estimates are used in turn to examine the efficiency of stations selected by the central electricity board to supply the national grid the results imply that a decentralized system was not only feasible but that the selection procedure was sensitive to efficiency differences at plant level copyright 1992 by royal economic society

a model of the impact of reimbursement schemes on health plan choice flat capitation uniform prospective payments makes enrolling healthy enrollees profitable to health plans plans with relatively generous benefits may attract the sick and fail through a premium spiral we simulate a model of idealized managed competition to explore the effect on market performance of alternatives to flat capitation such as severity adjusted capitation and reduced supply side cost sharing in our model flat capitation causes severe market problems severity adjustment and to a lesser extent reduced supply side cost sharing improve market performance but outcomes are efficient only in cases in which people bear the marginal costs of their choices

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

human fallibility and economic organization doctrines concerning what is a good way to organize a society have influenced human societies more deeply than any other set of doctrines specifically beliefs that one way of organizing production and exchange is better than others have inspired a number of socioeconomic experiments leading to modern capitalist and socialist societies with far reaching implications yet surprisingly the central doctrines though a source of continuing ideological debate have been the subject of only limited scientific enquiry the major proposition the so called langelerner taylor theorem asserting the equivalence between competitive capitalist economies and decentralized socialist economies which make use of the price system made a point in stressing that the issue of the ownership of the means of production might not be central in the comparison of economic systems the theorem however was based on models both of capitalism and of market socialism in which the most important differences between the two systems were suppressed this paper describes a research program attempting to delineate some of the critical differences among alternative forms of economic organization we contend that central to an understanding of these differences is an understanding of differences in the organization of decision making of who gathers what information how it gets communicated and to whom and how decisions get made both concerning what actions to take and who should fill decision making positions this view should be contrasted with the traditional economic paradigm in which decision making plays no role the manager for instance simply looks up in a book of blueprints what the appropriate technique of production is for the given set of factor prices in the conventional paradigm moreover mistakes are never made either in gathering or transmitting information or in making decisions and indeed there are no costs associated with these activities by contrast the view we take here is that to err is human and that different organizational systems differ not only in what kinds of errors individuals make in them but also in how the systems aggregate errors as a result organizations differ systematically in the kinds of errors they make and thus in their overall economic performance organizations also differ in the costs associated with information collection with information communication and processing and with decision making indeed as we discuss below perfect decision making can be achieved by arranging enough decision makers in an appropriate manner no matter how fallible the decision makers are provided their decisions are not purely random or worse what prevents perfect decision making is the cost we refer to the specification of the structure of information gathering communication and decision making as an organization s architecture the objective of our research program has been to construct stylized models of an economic organization within which the consequences of alternative organizational architectures can be examined using these models not only can we compare the performance of particular organizational forms but we can also ask given a particular set of objectives and circumstances what is the optimal structure within tdiscussants david kreps stanford university paul milgrom yale university

optimal retail contracts with asymmetric information and moral hazard constrained joint profit maximizing retail contracts are derived when the dealer is privately informed about demand conditions before contracting with the manufacturer demand is increased by dealer promotion which is unobservable by the manufacturer consequently the manufacturer does not know whether to attribute a low level of sales to a decline in demand or to a lack of promotion we show that in general the optimal contract exhibits some form of resale price maintenance and quantity fixing the type of resale price maintenance and quantity fixing depends on how price and quantity affect the link between sales and promotion

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

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

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

testing the limits of privatization argentine railroads abstract just how far can privatization be pushed and with what consequences based on a study of argentine railroads this paper concludes that even large unprofitable firms in developing countries faced with market failures can be privatized but the gains from doing so depend on how badly the state enterprise was performing to begin with and the potential for introducing competition in the market and for the market the broader lesson is that when both market failures and government failures are present a public private solution is preferable to a purely private or a purely public solution privatization is not a panacea but potentially a palliative when it comes to reducing subsidies or coping with regulatory failures

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

homogenous and heterogenous contestants in piece rate tournaments theory and empirical analysis in this article we show that sorting different ability contestants in piece rate tournaments into more homogenous groups alters agents incentives to exert effort we propose a method for structurally estimating the piece rate tournament game with heterogenous players and apply it to the payroll data from a broiler production contract our counterfactual analysis shows that under reasonable assumptions both the principal and the growers can gain when the tournament groups are heterogenized this business strategy could be difficult to implement in real life settings however this article has supplementary material online

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

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

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

a dea based incentives system for centrally managed multi unit organisations in multi unit organisations such as a bank and its branches or a national body delivering publicly funded health or education services through local operating units the need arises to incentivize the units to operate efficiently in such instances it is generally accepted that units found to be inefficient can be encouraged to make efficiency savings however units which are found to be efficient need to be incentivized in a different manner it has been suggested that efficient units could be incentivized by some reward compatible with the level to which their attainment exceeds that of the best of the rest normally referred to as super efficiency a recent approach to this issue varmaz et al 2013 has used data envelopment analysis dea models to measure the super efficiency of the whole system of operating units with and without the involvement of each unit in turn in order to provide incentives we identify shortcomings in this approach and use it as a starting point to develop a new dea based system for incentivizing operating units to operate efficiently for the benefit of the aggregate system of units data from a small german retail bank is used to illustrate our method

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

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

incentive regulation of electricity distribution networks lessons of experience from britain this paper reviews the recent experience of the uk electricity distribution sector under incentive regulation the uk has a significant and transparent history in implementing incentive regulation in the period since 1990 we demonstrate the successes of this period in reducing costs prices and energy losses while maintaining quality of service we also draw out the lessons for other countries in implementing distribution sector reform we conclude by discussing the place of incentive regulation of networks within the wider reform context the required legislative framework the need for appropriate unbundling the importance of quality of service incentives the regulatory information requirements and the role of sector rationalisation

can yardstick competition reduce waiting times yardstick competition is a regulatory scheme for local monopolists e g hospitals where the monopolist s reimbursement is linked to performance relative to other equivalent monopolists this re

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

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

regulation of natural gas distribution using policy benchmarks local distribution companies ldcs play the role of purchasing and delivering natural gas to their consumers and state regulators oversee the pricing of natural gas to consumers the common method of regulation based on the cost of service provides arguably little incentive for the ldc to optimally manage their procurement activities in the light of recent deregulation and other changes benchmarking based regulatory schemes are being increasingly perceived as the right direction to pursue various states are experimenting with simple benchmark mechanisms that have inherent deficiencies and are often criticized in this paper we propose and characterize a new kind of benchmark that we call a policy benchmark as a mechanism for regulation using variance as the measure of risk we formulate the regulator s and the ldc s problems as multiple objective optimizations we provide rigorous characterizations of the dominance frontiers for a two stage model we also provide multistage formulations that take

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

does decentralization contribute to efficiency evidence from oecd countries abstractthis article provides evidence on the relationship between fiscal decentralization and technical efficiency we begin the first stage of this study with a data envelopment analysis to obtain technical efficiency estimates for a sample of 23 oecd countries over the period 1992 2009 in a second stage we explore the effects of fiscal decentralization and other control variables on technical efficiency the results including all the control variables reveal a statistically significant negative relationship between fiscal decentralization of public expenditure and technical efficiency

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

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

the optimal decision rule for fixed size committees in dichotomous choice situations the general result this paper presents a general pairwise choice framework and derives the optimal decision rule for fixed size committees the main result generalizes a number of earlier results in the subject copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

competition and the reform of incentive schemes in the regulated sector abstract we consider a regulation problem with complete contracting in a principal agent model with adverse selection and review within this model the various channels by which external competition parameters affect incentives within the regulated firm the channels are the principal s information the principal s objective function the agent s incentive constraint the agent s participation constraint we consider in particular a better information structure a threat of liquidation a fight for talent a more efficient private sector and the existence of better substitutes we characterize in each case the conditions under which the effect on incentives is positive

price cap regulation incentives and quality the case of brazilian telecommunications abstract this paper reviews the incentive properties of yardstick schemes with special reference to quality performance and to the economic foundations and practical applications of data envelopment analysis dea the core of the paper is related to the construction of synthetic relative efficiency scores for quality which were obtained for brazilian local telephony over the period 1998 2002 the telecommunications industry in brazil has been characterized by the recent implementation of price cap regulation the evidence indicates substantial quality underperformance with some improvements towards the end of the period the efficiency scores obtained based on the flexible dea approach suggest that adjustment factors should be used in the productivity offset of the price cap rule so as to provide premiums for superior quality performance in terms of lower x factors the dea based yardstick procedure can provide a practical alternative to monitoring a series of specific quality indicators in terms of a set of penalties for underperformance the composite quality indicators do not rule out the identification of optimal adjustments recommended for individual indicators

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

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

bundled payments for healthcare services proposer selection and information sharing the centers for medicare and medicaid services cms has introduced a bundled payments for care improvement bpci initiative each bundle pertains to a specific medical condition a set of linked services and a length of time referred to as an episode of care proposers choose bundles design service chains and propose target values of quality metrics and payments per episode expert panels evaluate proposals based on cms announced relative weights but there is no limit on the number of proposers that may be selected moreover there is no minimum score that will guarantee selection which makes selection uncertain for proposers we develop normative models for the parameter selection problems faced by potential proposers within the cms proposal selection process proposers have private information about their costs of achieving different quality targets which determine their equilibrium responses we show that an optimal strategy for cms under its current approach may be to either announce a fi

standard costs of regional public rail passenger transport evidence from italy the paper estimates the standard cost in italian regional public rail passenger transport services lptr depending on service characteristics the results highlight the crucial role of number of

efficiency in the public and private french water utilities prospects for benchmarking this article uses a data envelopment analysis dea and a stochastic frontier analysis sfa to assess the relative technical efficiency of 177 decision making units in the french water supply sector in 2009 water utilities can be directly managed by the local authorities or contracted out and then managed by a private operator the use of a three stage model mixing dea and sfa enables us to dissociate managerial inefficiencies from the structural inefficiencies and statistical noise after having taken the environmental variables into account we find that private management are on average slightly less efficient than public management an explanation to this performance gap can be different resource management

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

regulation with 20 20 hindsight heads i win tails you lose regulators are commonly accused of using 20 20 hindsight to punish a firm for bad outcomes rather than bad decisions it is often thought that such penalties lead to underinvestment by the firm i find that this expectation is not borne out when retrospective review is based on the firm s avoided costs in a joskow type model hindsight review mitigates the firm s tendency to build oversized risky projects moving the firm closer to the cost minimizing level of investment in a rate of return model the firm s allowed rate of return may have to be increased to keep expected profits nonnegative if this is done hindsight review does not affect the firm s investment level but it does correct the risk neutral firm s tendency to pay an excessive premium to eliminate construction cost uncertainty

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

investment criteria in single and multi member economic organizations this paper compares the determination of investment criteriain single and multi member organizations individualdecisional skills are assumed to be endogenous variables thatdepend on the investment criteria our main result specifiesthe condition that determines the relationship between theinvestment criteria in single and multi member organizations given the size of the multi member organization the decisionrule it applies and the function relating the individual sdecisional skills to the investment criterion theimplications of our main result are developed for specialorganizations such as hierarchies and polyarchies ouranalysis implies that the criteria in a multi memberorganization may be stricter than the criteria set in asingle member organization even though in the former case theorganization may worsen the average decision making ability ofits members the analysis can be applied not only in singleand multi member decision making settings but also in somecontexts of centralized and decentralized decisions this isillustrated in the case of decisions by editors ofprofessional journals regarding the acceptance or rejection ofsubmitted papers

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

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

cap prices or cap revenues the dilemma of electric utility networks abstract in this paper i analyse the behaviour of a monopoly electricity provider that serves three distinct markets under a price cap or revenue cap plan i make comparisons in terms of their effects on price setting energy conservation and social welfare in addition to contravening the ramsey pricing rule i find that under conditions of information asymmetry when demand becomes more elastic or marginal cost increases revenue cap price increases are larger relative to price cap regulation in this specific setting revenue cap price increases can encourage energy conservation but is less likely to do so when marginal cost is large in a market that is more elastic relative to others in contrast to a price cap plan these overall results show that revenue cap schemes are welfare reducing for public policy decision making purposes price cap regulation is more desirable especially in developing economies that often experience substantial inflationary pressures from global oil market developments but is less suitable than revenue cap regulation when electricity supply constraints and climate change are major policy concerns

decision support for target based resource allocation of public services in multiunit and multilevel systems this paper is concerned with the problem of resource allocationand target setting in the provision of public services the paper develops a network based representation of multilevel resource management with equity efficiency and effectiveness being recognised as the fundamental objectives of the system on the modelling side the proposed method combines data envelopment analysis and goal programming formulations integrated within an interactive planning framework an illustrative application on fire departments is used to show the applicability of the method developed to assist the resource allocation process