Electricity wheeling and incentive regulation

This paper relates social contract regulation strategies to a particularly important comtemporary issue in energy regulation—electricity wheeling; we find that substantial gains in economic efficiency may be possible. First, social contracts give potential wheelers more monetary incentive than traditional regulatory procedures to provide wheeling services to interested third parties. Second, social contract regulation gives potential wheelers better incentives to measure marginal costs accurately. Third, under social contract regulation, wheelers have proper incentives to install efficient amounts of transmission capacity, thereby avoiding Averch-Johnson and other regulatory distortions that emerge in traditional regulation.     

Incentive regulation,service quality,and standards in U.S. electricity distribution

The widespread use of incentive regulation in telecom, electricity, and other industries in the U.S. and elsewhere has raised questions about its possible adverse effect on the quality of service. This paper examines U.S. electricity distribution utilities in the years 1993–1999, several of which were subject to incentive regulation. Controlling for other possible influences, including possible endogeneity of the regulatory regime, the data and model indicate that incentive regulation is indeed associated with significantly longer duration of service outages, although not necessarily more frequent outages. Importantly, this quality reduction is offset in cases where regulation incorporates service quality standards. We also examine the causal chain connecting incentive regulation, cost expenditures, and service quality. We conclude that careful design of quality standards can allow incentive regulation to achieve cost savings without quality degradation.     

Price-cap versus rate-of-return regulation

Rate-of-return regulation has been criticized for providing inappropriate incentives to regulated firms and for being costly to administer. An alternative is price-cap regulation, by which ceilings (caps), based on indices of price and technological change are imposed, below which the regulated firm has full pricing freedom. The differences and similarities of the two are reviewed herein in the light of recent literature. In practice, price-cap is not distinct from rate-of-return regulation. Especially for the multiproduct firm, information requirements—the ultimate source of problems with rate-of-return regulation—are comparables. Price-cap regulation fails to address the real regulatory issue of whether an industry is, in whole or in part, a natural monopoly.     

Technical efficiency,allocative efficiency,and the impact of incentive regulation in telecommunications in the United States

Incentive regulation is now an important regulatory tool in the telecommunications industry in the United States. The objective of incentive regulation is to improve productive efficiency, enhance service quality and consumer welfare, and reduce the costs of regulation. The issue that is considered here is whether incentive regulation in the form of a price cap applicable to interstate access service to local loops has resulted in an increase in the technical efficiency and allocative efficiency of local exchange carriers (LECs). After discussing the reasons for adopting incentive regulation, the nature of price caps is explored followed by an overview of the methodology for measuring the effects of incentive regulation on productive efficiency. The results indicate that for changes in technical efficiency, there is a definite randomness between 1985 and 1993 with technical efficiency increasing in some years and decreasing in others. Subsequent to 1993, however, there is a consistent improvement in technical efficiency. Given that incentive regulation in the forin of price caps was implemented for LECs in 1991, it is likely that some portion of the improvement in technical efficiency subsequent to 1993 is attributable to incentive regulation. A pronounced upward trend in allocative efficiency is observed beginning in 1985. It is problematic, however, to attribute the improvement in allocative efficiency to the adoption of incentive regulation. It is more likely an artifact of the divestiture of AT&T although some indeterminant portion is probably associated with the implementation of price caps.JEL classification: L51, L96     

The effects of incentive regulation in the telecommunications industry: A survey

We review recent empirical studies of the performance of incentive regulation in the telecommunications industry. These studies provide evidence that productivity, infrastructure investment, profit levels, telephone penetration, and new service offerings have increased under incentive regulation. Service rates have generally remained stable or decreased slightly, and service quality does not appear to have been affected adversely. There is no evidence that incentive regulation has led to streamlined regulatory proceedings. Strong evidence that incentive regulation has reduced the costs of providing telephone service has not yet materialized.We thank Sanford Berg, Alex Larson, Larry Schelhorse, and Timothy Tardiff for very helpful comments and discussion. We are also grateful to Michael Crew and Ingo Vogelsang for a particularly careful and insightful review of this paper.     

Separation of Regulatory Powers When Contracts Are Incomplete

The investment of a regulated firm affects the service/good provided on many dimensions. Should an integrated regulator take care of them all? Or is it better to have separate regulators responsible for them? We analyze the effect of the separation of regulatory powers on the regulated firm's ex ante incentive to invest in a “cooperative” innovation. The effects of the innovation are not verifiable and the cost of investing is sunk, hence, there is a problem of hold‐up. We find that when the innovation produces opposite effects the ex ante firm's incentive to invest is larger in the case of separation than in the case of integrated regulation. We also stress the risk of over‐investment that the separation of regulatory powers may induce. We maintain that along with classical incentive regulation—which mainly provides incentives for the firm to be efficient—the separation of regulatory powers may play a role in providing an incentive for cooperative innovations.     

The Impact of State Incentive Regulation on the U.S. Telecommunications Industry

We examine the impact of state incentive regulation on network modernization, aggregate investment, revenue, cost, profit, and local service rates in the U.S. telecommunications industry between 1986 and 1999. We find evidence of greater network modernization under price cap regulation (PCR), earnings sharing regulation (ESR), and rate case moratoria (RCM) than under rate of return regulation (RORR). Costs are generally lower under RCM. Costs are also lower under ESR and PCR when local competition is sufficiently intense. Some local service rates for business customers are lower under PCR. Revenue, profit, aggregate investment, and residential local service rates do not vary systematically under incentive regulation relative to RORR.     

Toward improved and practical incentive regulation

The first half of this paper overviews traditional methods of ratemaking—embedded and marginal cost pricing—and four recent alternatives—automatic rate adjustments, profit-sharing, tariff menus, and the Vogelsang-Finsinger convergence mechanism—that have come to challenge them. We develop a list of nine desirable properties that are suitable to gauge any regulatory mechanism. In the second half of the paper, we explore in greater detail two recent incentive plans—the FCC's price caps approach and a mechanism that the three authors proposed in a FERC document. Based on the nine properties, these two mechanisms are compared.     

Culture,business environment and SMEs' profitability: Evidence from European Countries

This paper aims to examine whether and how, certain country-specific characteristics shape the profitability of SMEs. Using a large sample of around 40,000 firms operating in 25 EU countries over the period 2006–2014 we find that freedom from corruption, a better environment in terms of the conditions that could contribute to the ease of getting credit, and fewer government regulation related to the starting, operating, and closing a business, enhance profitability. The dimensions of national culture also play an important role. Our results show that individualism, masculinity, and long-term orientation have a positive impact on profitability, whereas power distance and uncertainty avoidance have the opposite effect. We also find that the magnitude of the impact of national culture on profitability depends on political stability and institutional quality.     

A dynamic perspective on minimum quality standards under Cournot competition

Imposing a minimum quality standard (MQS) is conventionally regarded as harmful if firms compete in quantities. This, however, ignores its possible dynamic effects. We show that an MQS can hinder collusion, resulting in dynamic welfare gains that reduce and may outweigh the static losses which are caused by regulation’s distortive effect on equilibrium qualities.     

Strategic Firm Behavior Under Average-Revenue-Lagged Regulation

Price caps have been shown to have incentive properties superior to traditional rate of return regulation. Average-revenue-lagged regulation (ARL) is attractive in that steady-state prices are known to be efficient. We show that the ARL scheme can be manipulated by the firm so as to yield the unregulated global profit maximum. While tests exist that can provide the regulator with evidence of this strategic behavior, we also demonstrate that the unregulated global profit maximum will not be attainable if Laspeyres (L) regulation is employed.Jel classification: L43, L51I would like to thank Michael Crew and an anonymous referee for their extremely helpful suggestions.     

Gift giving and worker productivity: Evidence from a firm-level experiment

We present results from a field experiment, designed to measure worker response to a monetary gift from their employer. The experiment took place inside a tree-planting firm paying its workforce incentive contracts. Firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity. We compare planter productivity—the number of trees planted per day—on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block, and thus under similar planting conditions. We find direct evidence that the gift had a significant and positive effect on daily planter productivity, controlling for planter-fixed effects, weather conditions and other random daily shocks.     

Do Subjects Separate (or Are They Sophisticated)?

In many experiments, particularly individual choice experiments, experimenters ask many questions to the subjects and use the random lottery incentive mechanism to give an incentive to the subjects. That is, the experimenter, at the end of the experiment, picks just one of the questions, plays out that question, and pays the subject on the basis of this one question. The idea is that subjects should separate the various questions and reply to each as if it were a separate question—in isolation from all the other questions in the experiment. This procedure is methodologically sound if the subjects behave in accordance with Expected Utility (EU) theory, since this theory says that the best procedure for the subjects is to separate the various questions. However, if there is any doubt as to whether the subjects obey EU theory, and particularly if the experiment is designed to test whether the behaviour of the subjects is in accordance with EU, this incentive mechanism is open to criticism. Indeed many referees use this argument against the research. The response that the subjects may not respect EU, yet still separate the various questions, is obviously open to objection and generally it is not clear whether this response is valid or not. There have been two direct tests of this separation hypothesis (by Starmer and Sugden (1991) and by Cubitt et al. (1998), which suggest that it is valid, but further evidence is required. This paper provides a further, stronger, test of this hypothesis: we confront the two stories—(1) that the subjects answer the various questions separately, and (2) that the subjects respond to the experiment as a whole—using experimental data from an experiment in which the random lottery incentive mechanism was used. Our analysis shows that it would appear that subjects do answer as if they were separating the questions. This should be considered reassuring for those experimenters who use the random lottery incentive mechanism.     

A characterization of virtual Bayesian implementation

We provide a characterization of virtual Bayesian implementation in pure strategies for environments satisfying no-total-indifference. A social choice function in such environments is virtually Bayesian implementable if and only if it satisfies incentive compatibility and a condition we term virtual monotonicity. The latter is weaker than Bayesian monotonicity—known to be necessary for Bayesian implementation. Virtual monotonicity is weak in the sense that it is generically satisfied in environments with at least three alternatives. This implies that in most environments virtual Bayesian implementation is as successful as it can be (incentive compatibility is the only condition needed).     

Property and contract rights in autocracies and democracies

We present and test empirically a new theory of property and contract rights. Any incentive an autocrat has to respect such rights comes from his interest in future tax collections and national income and increases with his planning horizon. We find a compelling empirical relationship between property and contract rights and an autocrat's time in power. In lasting—but not in new—democracies, the same rule of law and individual rights that ensure continued free elections entail extensive property and contract rights. We show that the age of a democratic system is strongly correlated with property and contract rights.     

Strong equilibrium in cost sharing connection games

We study network games in which each player wishes to connect his source and sink, and the cost of each edge is shared among its users either equally (in Fair Connection Games—FCG's) or arbitrarily (in General Connection Games—GCG's). We study the existence and quality of strong equilibria (SE)—strategy profiles from which no coalition can improve the cost of each of its members—in these settings. We show that SE always exist in the following games: (1) Single source and sink FCG's and GCG's. (2) Single source multiple sinks FCG's and GCG's on series parallel graphs. (3) Multi source and sink FCG's on extension parallel graphs. As for the quality of the SE, in any FCG with n players, the cost of any SE is bounded by H(n) (i.e., the harmonic sum), contrasted with the Θ(n) price of anarchy. For any GCG, any SE is optimal.     

Computationally-feasible truthful auctions for convex bundles

In many economic settings, like spectrum and real-estate auctions, geometric figures on the plane are for sale. Each bidder bids for his desired figure, and the auctioneer has to choose a set of disjoint figures that maximizes the social welfare. In this work, we design mechanisms that are both incentive compatible and computationally feasible for these environments. Since the underlying algorithmic problem is computationally hard, these mechanisms cannot always achieve the optimal welfare; Nevertheless, they do guarantee a fraction of the optimal solution. We differentiate between two information models—when both the desired figures and their values are unknown to the auctioneer or when only the agents' values are private data. We guarantee different fractions of the optimal welfare for each information model and for different families of figures (e.g., arbitrary convex figures or axis-aligned rectangles). We suggest using a measure on the geometric diversity of the figures for expressing the quality of the approximations that our mechanisms provide.     

Ex post implementation

We analyze the problem of fully implementing a social choice set in ex post equilibrium. We identify an ex post monotonicity condition that is necessary and—in economic environments—sufficient for full implementation in ex post equilibrium. We also identify an ex post monotonicity no veto condition that is sufficient. Ex post monotonicity is satisfied in all single crossing environments with strict ex post incentive constraints.We show by means of two classic examples that ex post monotonicity does not imply nor is it implied by Maskin monotonicity. The single unit auction with interdependent valuations is shown to satisfy ex post monotonicity but not Maskin monotonicity. We further describe a Pareto correspondence that fails ex post monotonicity but satisfies Maskin monotonicity.     

声誉激励、社会监督与质量规制——城市垃圾处理行业中的博弈分析

我国实施市政公用事业市场化改革以来,民营企业通过竞标等方式从政府手中获取特许经营权,凭借其垄断地位和信息优势降低服务标准,导致垃圾处理行业陷入质量规制的困境。本文针对城市垃圾处理行业的问题,先是构建以规制机构与垃圾处理特许经营企业为参与者的博弈模型,分析了声誉激励和社会监督对博弈参与双方损益及其策略的影响;然后构建纳入举报机制的由社会民众、规制机构和特许经营企业三方参与的序列博弈模型。研究得出四点结论：（1）减少规制成本,增加对违规垃圾处理企业的惩罚力度,可减少企业违规概率;（2）声誉激励和社会监督均可减少垃圾处理特许经营企业违规概率;（3）社会监督有助于节约规制成本,减弱规制机构与企业间信息不对称程度,提高规制效率;（4）规制机构的检查行为与公众举报行为之间存在明显的互补性。最后针对性地提出了提高城市垃圾处理行业质量规制效果的政策建议。     

Price Discrimination in Public Healthcare

Could a public healthcare system use price discrimination—paying medical service providers different fees, depending on the service provider's quality—lead to improvements in social welfare? We show that differentiating medical fees by quality increases social welfare relative to uniform pricing (i.e. quality‐invariant fee schedules) whenever hospitals and doctors have private information about their own ability. We also show that by moving from uniform to differentiated medical fees, the public healthcare system can effectively incentivise good doctors and hospitals (i.e. low‐cost‐types) to provide even higher levels of quality than they would under complete information. In the socially optimal quality‐differentiated medical fee system, low‐cost‐type medical‐service providers enjoy a rent due to their informational advantage. Informational rent is socially beneficial because it gives service providers a strong incentive to invest in the extra training required to deliver high‐quality services at low cost, providing yet another efficiency gain from quality‐differentiated medical fees.