Performance Insurance: Rewarding Managers for Better Service

Abstract:     
A monopolistic urban water supplier may succeed or fail in providing good service to its captive customers. Regulators can use benchmarks to rank performance and create virtual competition, but quantified outputs are imperfectly correlated with outcomes that matter to customers. Even worse, regulators face weak incentives to identify and target these outcomes. This paper suggests that insurance companies can supplement regulatory effort while improving outcomes, by providing policies based on difficult-to-measure factors such as water managers' effort and talent. Insurance will protect consumers from paying too much for water service or experiencing too many service interruptions.

Number of Pages in PDF File: 5

Keywords: water utility, monopoly, benchmark competition, insurance, regulation

JEL Classification: K23, L51, Q28, G22

working papers series