Information Asymmetries and Regulatory Decision Costs: An Analysis of U.S. Electric Utility Rate Changes 1980-2000

Abstract

We argue that information asymmetries between regulators and firms increase the administrative decision costs of initiating new policies due to the costs of satisfying evidentiary or “burden of proof” requirements. We further contend that regulators with better information about regulated firms – i.e. with lower information asymmetries - have lower decision costs, thereby facilitating regulator policy-making. To empirically test our predictions, we examine the relationship between regulatory informational environments and changes to regulated rates for all investor-owned electric utilities from 1980 to 2000. We exploit several natural sources of variation in the informational environments of U.S. state utility regulators. These stem from the prior experiences and administrative resources of regulators; observable policy decisions of other regulatory agencies for a given utility; and differences in procedural regulations pertaining to rate increases and decreases. Our results suggest that as regulators acquire more information about utility operations, including from experience in office, they are more likely to enact rate decreases and less likely to implement rate increases.

Keywords: Asymmetric information, regulation, public utilities, decision costs, rate-making

JEL Classification: K2, L5, L9