The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States
32 Pages Posted: 31 Aug 2010 Last revised: 18 Feb 2017
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
The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States
Date Written: October 25, 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 the reformer is more concerned about incentivizing investments through higher expected profits, and where rent extraction is less salient because the extent of asymmetric information is more limited. 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 than those in neighboring markets and operating in states where the regulator had stronger incentives to exert information-gathering effort because elected instead of being appointed. Considering the endogeneity of regulatory reforms suggests that OLS overestimate the impact of incentive rules 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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