Incentive Regulation: Evidence From German Electricity Networks

63 Pages Posted: 23 Feb 2018 Last revised: 29 Mar 2019

See all articles by Michael Hellwig

Michael Hellwig

ZEW – Leibniz Centre for European Economic Research - Competition and Regulation Research Group

Dominik Schober

ZEW – Leibniz Centre for European Economic Research

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: February 1, 2018

Abstract

We propose a difference-in-differences (DiD) approach to estimate the impact of incentives on cost reduction. We show theoretically, and estimate empirically, that German electricity distribution system operators (DSOs) incur higher costs when subject to a lower powered regulation mechanism. The difference is particularly significant (about 7%) for firms in the upper quartile of the efficiency distribution, a pattern which is consistent with the pooling of types under the threat of ratcheting.

Keywords: Regulation, Ratchet Effect, Electricity Utilities, Difference-in-Differences, Efficiency Analysis

JEL Classification: K23, L51, L94, L98, D24, D82

Suggested Citation

Hellwig, Michael and Schober, Dominik and Cabral, Luis M. B., Incentive Regulation: Evidence From German Electricity Networks (February 1, 2018). ZEW - Centre for European Economic Research Discussion Paper No. 18-010. Available at SSRN: https://ssrn.com/abstract=3128752 or http://dx.doi.org/10.2139/ssrn.3128752

Michael Hellwig (Contact Author)

ZEW – Leibniz Centre for European Economic Research - Competition and Regulation Research Group ( email )

L7,1
Mannheim, 68161
Germany

Dominik Schober

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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