Performance Insurance: Rewarding Managers for Better Service
5 Pages Posted: 19 Sep 2011 Last revised: 11 Mar 2013
Date Written: September 16, 2011
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.
Keywords: water utility, monopoly, benchmark competition, insurance, regulation
JEL Classification: K23, L51, Q28, G22
Suggested Citation: Suggested Citation