Does competition reduce costs?
Subtitle: assessing the impact of regulatory restructuring on U.S. electric generation efficiency
By: Kira Markiewicz, Nancy Rose [and] Catherin Wolfram
Contributors: Rose, Nancy L.; Wolfram, Catherine D.; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-37; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-37.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 50
Description: Although the allocative efficiency benefits of competition are a tenet of microeconomic theory, the relation between competition and technical efficiency is less well understood. Neoclassical models of profit-maximization subsume static cost-minimizing behavior regardless of market competitiveness, but agency models of managerial behavior suggest possible scope for competition to influence cost-reducing effort choices. This paper explores the empirical effects of competition on technical efficiency in the context of electricity industry restructuring. Restructuring programs adopted by many U.S. states made utilities residual claimants to cost savings and increased their exposure to competitive markets. We estimate the impact of these changes on annual generating plant-level input demand for non-fuel operating expenses, the number of employees and fuel use. We find that municipally-owned plants, whose owners were for the most part unaffected by restructuring, experienced the smallest efficiency gains over the past decade. Investor-owned utility plants in states that restructured their wholesale electricity markets had the largest reductions in nonfuel operating expenses and employment, while investor-owned plants in nonrestructuring states fell between these extremes. The analysis also highlights the substantive importance of treating the simultaneity of input and output decisions, which we do through an instrumental variables approach. Keywords: Efficiency, Production, Competition, Electricity restructuring, Electric Generation, Regulation. JEL Classifications: L11, L43, L51, L94, D24.
Notes: "November 2004."

Includes bibliographical references (p. 44-46).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.