The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States
IEFE Working Paper No. 31
46 Pages Posted: 5 Apr 2010
There are 3 versions of this paper
The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States
The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States
Date Written: March 31, 2010
Abstract
The determinants of incentive regulation are a key issue in economics. More powerful rules relax allocative distortions at the cost of lower rent extraction. Thus, they should be found where rent extraction is less salient because the information-gathering process is more efficient, and where the reformer wants to incentivize more investments through higher rents. This prediction is consistent with U.S. electricity market data. During the 1990s, performance based contracts were given to the firms whose generation costs were historically higher and operating in states where the regulators had stronger incentives to exert information-gathering effort because elected instead of being appointed. Considering the endogeneity of regulatory institutions to technological and political forces suggests that OLS overestimate the impact of incentive regulation on costs, which was negative and statistically significant.
Keywords: Incentive Regulation, Regulatory Capture, Electricity, Accountability
JEL Classification: L11, L51, L94, D73
Suggested Citation: Suggested Citation
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