The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States

IEFE Working Paper No. 31

46 Pages Posted: 5 Apr 2010

See all articles by Carmine Guerriero

Carmine Guerriero

Department of Economics, University of Bologna

Multiple version iconThere are 3 versions of this paper

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

Guerriero, Carmine, The Political Economy of Incentive Regulation: Theory and Evidence from U.S. States (March 31, 2010). IEFE Working Paper No. 31, Available at SSRN: https://ssrn.com/abstract=1582347 or http://dx.doi.org/10.2139/ssrn.1582347

Carmine Guerriero (Contact Author)

Department of Economics, University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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