Showing papers in "Journal of Regulatory Economics in 1993"
TL;DR: In this article, the differences and similarities of price-cap regulation and rate-of-return regulation are reviewed in the light of recent literature, and a comparison of the two is made.
Abstract: 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.
152 citations
TL;DR: In this paper, the authors study the market for emission allowances stipulated in the 1990 Clean Air Act Amendment and derive an explicit formula for the option value and present computational results to illustrate its likely magnitude.
Abstract: We study the market for emission allowances stipulated in the 1990 Clean Air Act Amendment. We assume that the number of allowances is fixed and that demand is affected by a stochastic parameter that follows a Wiener process (‘Brownian motion’). The optimal investment policy for scrubbers is characterized. Investments in scrubbers are reduced if there is greater uncertainty about future market conditions. This is because purchases of emission allowances provide flexibility to adapt to demand conditions in a way that installing scrubbers does not. The price of emission allowances may therefore exceed the marginal cost of scrubbers by an amount called the option value. We derive an explicit formula for the option value and present computational results to illustrate its likely magnitude.
92 citations
TL;DR: The authors developed the welfare foundations of peak load pricing under uncertainty, building on Brown and Johnson (1969), Crew and Kleindorfer (1976), and Chao (1983), in the context of a welfare-maximizing public enterprise facing uncertain and nondeferrable demand, and uncertain supply.
Abstract: This paper develops the welfare foundations of peak-load pricing under uncertainty, building on Brown and Johnson (1969), Crew and Kleindorfer (1976), and Chao (1983). The context is that of a welfare-maximizing public enterprise facing uncertain and nondeferrable demand, and uncertain supply. The paper first describes various elements of outage cost, including rationing costs, disruption costs, and surplus losses due to unsatisfied demand. Exact welfare-optimal results are then derived, in contrast to the earlier approximations by Turvey and Anderson (1977) and Chao (1983). The results are generalized to take account of diverse technologies and multiple planning periods, and their implications for utility pricing and investment in an integrated resource planning context are discussed.
68 citations
TL;DR: In this paper, a highly disaggregated study of deregulated rail rates for seventeen commodities is presented, showing that the Staggers Act fundamentally altered the way in which rail carriers price their services and that shippers responded to altered railroad behavior by changing the characteristics of their shipments.
Abstract: The Staggers Rail Act of 1980 provided American railroads with almost complete relief from rate regulation. Regulatory reforms resulted in rapid and pronounced changes in firm behavior and an eventual reconfiguration of the industry as a whole. This investigation provides a highly disaggregated study of deregulated rail rates for seventeen commodities. The results indicate that the Staggers Act fundamentally altered the way in which rail carriers price their services. As importantly, the results suggest that shippers have responded to altered railroad behavior by changing the characteristics of their shipments. Together, the changes in railroad behavior and shipper responses to these variations have produced lower railroad rates for a small but measurable number of movements across a wide range of commodities.
67 citations
TL;DR: In this article, the authors show that the hybrid application of cost-based and price-cap regulation may generate qualitative distortions greater in magnitude than those realized under under-cost-based regulation.
Abstract: A substantial body of recent research finds thatprice-cap regulation is superior tocost-based regulation in that many of the distortions associated with the latter are reduced or eliminated entirely. We prove that the hybrid application ofcost-based and price-cap regulation that characterizes current regulatory practice in the United States telecommunications industry may generate qualitative distortions greater in magnitude than those realized undercost-based regulation. It follows thatprice-based regulation in practice may be welfare-inferior tocost-based regulation. The analysis further reveals that the firm subject to this modified form ofprice-based regulation may have incentives to engage in pure waste.
67 citations
TL;DR: In this paper, an optimal incentive tax/subsidy scheme in an oligopoly market with pollution is presented, as a generalization of the Loeb-Magat scheme, which is nondiscriminatory and requires less information for implementation than the conventional ones.
Abstract: This paper constructs an optimal incentive tax/subsidy scheme in an oligopoly market with pollution, as a generalization of the Loeb-Magat scheme, which is nondiscriminatory and requires less information for implementation than the conventional ones. Some interesting properties of the scheme are discussed.
57 citations
TL;DR: In this paper, the tradeoff between potential coordination losses in transmission planning and benefits of competition is investigated, and some potential alternatives for improved regulation of the transmission planning process are examined, as well as a simple numerical example for the regulatory problem for joint generation and transmission cost minimization.
Abstract: We characterize the cost function for electric power transmission. It is complex and non-linear, exhibiting scale economies over its range. The social planning problem for network transmission expansion is illustrated with a simple numerical example. The regulatory problem for joint generation and transmission cost minimization is addressed. It is shown that information asymmetries about the transmission cost function can lead to coordination losses when there is competition in the generation segment. We parametrize the tradeoff between potential coordination losses in transmission planning and benefits of competition and examine some potential alternatives for improved regulation of the transmission planning process.
50 citations
TL;DR: In this paper, an empirical model of the decision to deregulate AT&T in the provision of intrastate interLATA telecommunications services is proposed and the results support the economic theory of regulation and fail to support the public interest theory.
Abstract: Observed variation in the decisions of state regulators to deregulate AT&T in the provision of intrastate interLATA telecommunications services provides useful data with which to test the economic theory of regulation against its principal alternative—the public interest theory. An empirical model of the decision to deregulate is specified and estimated. Our results lend empirical support to the economic theory of regulation and fail to support the public interest theory. The results also help to explain the lethargic pace of deregulation of this industry.
47 citations
TL;DR: In this article, the effects of price caps on the structure of prices are explored and the results are in important aspects at variance with the claim of convergence to a Ramsey-like structure.
Abstract: The paper deals with the argument that a price-cap regulated firm maximizing profits under the price-cap constraint will set prices that over time approach the Ramsey structure. My analysis explores the effects of price caps on the structure of prices. The results are in important aspects at variance with the claim of convergence to a Ramsey structure.
43 citations
TL;DR: In this article, the authors discuss the efficiency of the Swiss Private Railways in an economic and regulatory context and investigate the scale efficiency and overall cost efficiency for 48 Swiss private railway companies.
Abstract: This paper discusses the efficiency of the Swiss Private Railways in an economic and regulatory context. For this purpose, scale efficiency and overall cost efficiency for 48 Swiss private railway companies are investigated. A translog cost function for a four-year panel is estimated and measures of economies of scale and density are derived. A compound indicator for network size and structure is introduced. The estimation results allow for a discussion of efficiency in terms of optimal scale and density. Overall cost efficiency is estimated by means of a frontier cost function. The findings on efficiency are discussed in the Swiss political and regulatory context. More specifically, a regression on the influence of ownership and subsidy structure on the efficiency is performed. The findings are that most of the Swiss private railway companies operate at an inappropriately low scale and density. While the companies are rather homogenous in terms of overall cost efficiency, evidence is found for a significant influence of regulation in terms of the subsidy structure.
40 citations
TL;DR: In London an alternative policy has been adopted whereby there is Demsetz competition for short-term monopoly rights as discussed by the authors, and the authors argue that this regime will lead to greater benefits in the long run.
Abstract: In 1986,the British government deregulated the majority of the local bus industry, cut the amount of subsidy, and privatized many public bus companies. Unit costs have declined significantly, cross-subsidies have been reduced, and there has been innovation in operating practices. However, mergers have increased concentration, and demand has declined due to the turmoil of service changes and the loss of network integration. In London an alternative policy has been adopted whereby there is Demsetz competition for short-term monopoly rights. The paper argues that this regime will lead to greater benefits in the long run.
TL;DR: In this article, the authors investigate the effect of competition in the provision of cable television services on social welfare and conclude that competition will be welfare enhancing so long as it results in lower market prices.
Abstract: This paper investigates the effect of competition in the provision of cable television services on social welfare. We develop a simple theoretical model that suggests that competition will be welfare enhancing so long as it results in lower market prices. We empirically test for the presence of this condition by estimating a five equation system: First, the local franchising authority is viewed as self-selecting into a competitive or non-competitive environment in order to maximize its rents. Given this selection, the remaining four equations specify basic service and pay service penetration rate and price equations. Following Mayo and Otsuka (1991), the resulting system is estimated by two-stage least squares. We find that competition among suppliers lowers average basic cable rates by about $3.85 and the typical pay service rate by about $1.10, certis paribus. Mutatis mutandis estimates of these effects imply that monopoly franchising of cable service results in roughly $3.6 billion per year national welfare loss.
TL;DR: In this paper, the authors used the event study methodology on a portfolio of cable firms and found evidence that news of no reregulation caused significant positive abnormal returns, while news of reregulation had insignificant negative abnormal returns.
Abstract: During the 1988–1990 period, the cable television industry was subject to a number of regulatory events. These centered on possible reregulation of rates for basic service and reduction of entry barriers for potential competitors. Using the event study methodology on a portfolio of cable firms, we find evidence that news of no reregulation caused significant positive abnormal returns. News of reregulation caused insignificant negative abnormal returns. These findings provide some support for the traditional consumer protection theory of regulation. News related to entry barriers generally had no significant effect on returns, which suggests that elements of natural monopoly may exist in the industry.
TL;DR: In this paper, the authors analyzed the effect of rationing fuses on the Panzar-Sibley pricing scheme and proposed a self-rationing mechanism to solve the problem of untimely curtailments.
Abstract: In a recent issue of this Journal, Woo (1990) suggests a mechanism to improve on a pricing scheme initially proposed by Panzar and Sibley (1978). In this paper, we analyze Woo's mechanism. Woo claims that by activating rationing fuses only when total demand reaches system capacity, the problem of untimely curtailments is avoided. We show that this is trueonly if all consumers reach their subscribed capacity at the same temperature, which will not occur in general, and clarify the implications of this assumption on Woo's improvement of the Panzar-Sibley scheme. A slightly more complex self-rationing mechanism, which addresses the problems that we point out, is suggested.
TL;DR: In this paper, the economic theory of regulation has been used as an empirical support for alternative models of regulatory behavior, including alternative theories of regulatory behaviour and simple rules of thumb model selection tests.
Abstract: Empirical tests of the economic theory of regulation have typically consisted of estimation of a model of some observed regulatory decision, with various interest group variables incorporated as exogenous determinants of that decision Statistical significance of the coefficients of these interest group variables is then taken as empirical support for this theory Here, a different approach is adopted We specify seven alternative models based upon: (1) the economic theory of regulation, (2) alternative theories of regulatory behavior, and (3) simple rules of thumb Model selection tests are then performed Our findings reveal that the economic theory of regulation consistently outperforms the alternative models
TL;DR: In this article, the authors examine how this departure from past regulatory practice will affect the market value and market risk of the utility firm, and the specific manner in which an incentive mechanism can be implemented in order to achieve a desired valuation outcome.
Abstract: The objective of providing inducements for public utilities to seek to improve the efficiency of their operations has been a longstanding regulatory concern. Among the evolving strategies for furthering that objective is a shift toward what has come to be referred to as “incentive” regulation. We examine here how this departure from past regulatory practice will affect the market value and market risk of the utility firm, and the specific manner in which an incentive mechanism can be implemented in order to achieve a desired valuation outcome. A particular focus is the establishment of boundaries on allowed rates of return under incentive regulation which are consistent with that desired outcome. The likely impact on utility ratepayers is considered.
TL;DR: In this article, the effects of gender and other demographic features and benefit provisions on insurance premiums using individual data from a property and liability insurer domiciled in Georgia for three types of automobile insurance coverages: collision insurance, comprehensive insurance, and liability insurance.
Abstract: In this paper, we explore the effects of gender and other demographic features and benefit provisions on insurance premiums using individual data from a property and liability insurer domiciled in Georgia for three types of automobile insurance coverages: collision insurance, comprehensive insurance, and liability insurance. We report the implicit prices of individual and automobile underwriting attributes and find that the effect of gender on the insurance premium for each of our coverage types is significant but has a lower absolute effect than other underwriting attributes, raising questions about the regulatory impact of unisex statutes. Finally, we examine three alternatives open to the regulator who must mandate and monitor insurance pricing under a unisex statute.
TL;DR: In this article, the authors formalized and studied the argument of cartelization of industries through captured agencies and showed that with a rational political principal, the threat of regulatory capture increases the likelihood of entry.
Abstract: This paper formalizes and studies the argument of cartelization of industries through captured agencies. An agency can affect entry by a producer of a differentiated commodity in the market of a regulated natural monopoly through the manipulation of information it produces about the benefit of entry. Entry may be socially efficient because it enhances product diversity, or inefficient because it creates a duplication of fixed costs. We first show that because of informational asymmetries the agency will tend to prohibit entry. However with a rational political principal, the threat of regulatory capture increases the likelihood of entry. The effect of regulatory capture on incentives in the natural monopoly is also studied and the results are discussed and extended in various ways.
TL;DR: In this paper, the authors examine the incentives for abuse under rate-of-return (ROR) and incremental surplus subsidy (ISS) regulation and show that ISS regulation provides efficient incentives for owners of the regulated firm to limit abuse by subordinates.
Abstract: We examine the incentives for abuse under rate-of-return (ROR) and incremental surplus subsidy (ISS) regulation. Abuse consists of expenditures by the regulated firm that provide private benefits, but do not reduce production costs. We show that ISS regulation provides efficient incentives for owners of the regulated firm to limit abuse by subordinates. We also prove that abuse by owners of the firm will generally be greater (smaller) under ROR regulation than under ISS regulation when consumer demand for the regulated product is inelastic (elastic). Furthermore, we show that to limit abuse and improve welfare under ROR regulation, it can be advantageous to “ignore” available information about consumer demand.
TL;DR: In this article, the simultaneous determination of welfare-optimal pricing and investment rules under a multi-period ex ante maximum demand charge by allowing the possibility of purchasing electricity from third party generators at some cost when excess demand occurs is discussed.
Abstract: This paper deals with the simultaneous determination of welfare-optimal pricing and investment rules under a multi-period ex ante maximum demand charge by allowing the possibility of purchasing electricity from third party generators at some cost when excess demand occurs. I show that at the optimal size of capacity, expected short-run marginal shortage cost and long-run marginal capacity cost should be equal. The optimal maximum demand tariff does not entail marginal cost pricing. In general, it is shown that maximum demand charges are welfare superior to marginal cost pricing when tariffs must be set ex ante, before demand is known.
TL;DR: In this paper, the authors analyzed the impact of direct utility competition on scale and scope economies in the intrastate gas transmission industry and found that most firms operate at substantial decreasing returns to scale, and the largest firms suffer the biggest diseconomies of scale.
Abstract: This article describes and analyzes the Texas Railroad Commission's regulatory policies for the intrastate gas transmission industry, paying special attention to the impact of direct utility competition on scale and scope economies. Our econometric results suggest that most firms operate at substantial decreasing returns to scale, and the largest firms suffer the biggest diseconomies of scale. There are economies of scope between types of gas sales, but diseconomies of scope when a pipeline combines transportation with multiple categories of gas sales. These results suggest that the Texas Railroad Commission's liberal policies on entry and private contracting have not resulted in inefficient entry.
TL;DR: In this paper, it was shown that the long-run convergence of the prices of multi-product firms to Ramsey prices is endogenous and not the result of a Laspeyre quantity-based price cap.
Abstract: One of the merits claimed for certain types of price-cap regulation is the possible long-run convergence of the prices of multi-product firms to Ramsey prices. Typically such regulated firms define commodities by such devices as dividing the day into discrete periods, customers into age-groups, distances into ranges, and so on. Allowing that such division is endogenous throws doubt on the ability of Laspeyre quantity-based price-caps to encourage an efficient market definition and hence to generate an efficient price structure.
TL;DR: In this article, it was shown that if consumption of a good or service requires a certain amount of the consumer's time, that fact should be an influence on the socially optimal price.
Abstract: Little adjustment in labor or leisure time is possible because of standardized work weeks in many countries. Without such labor-leisure adjustment, the logic of the inverse-elasticity-rule form of Ramsey price, with its differing percentage markups, is undermined. Moreover, if consumption of a good or service requires a certain amount of the consumer's time, that fact should be an influence on the socially optimal price. These two considerations of consumers' time are shown to warrant serious attention in applications of Ramsey prices.
TL;DR: In this paper, the theoretical basis of the claim that product safety regulation may not lead to either a decrease in accident rates or an increase in consumer health is examined, and it is shown that the technology which determines the household's probability of having an accident may guarantee that regulation will lower accident rates, and therefore, predictions about the effect of regulation on the incidence of accidents can be made without detailed knowledge of consumer behavior.
Abstract: This paper examines the theoretical basis of the claim that product safety regulation may not lead to either a decrease in accident rates or an increase in consumer health. We find that the technology which determines the household's probability of having an accident may guarantee that regulation will lower accident rates, and that therefore, predictions about the effect of regulation on the incidence of accidents can be made without detailed knowledge of consumer behavior.
TL;DR: In this article, the authors developed and estimated a model of moral hazard in workers' compensation, and showed that an increase in real benefits significantly decreases the output of the firm, consistent with the notion that higher benefits induce more jobless spells and increase production costs using skilled labor.
Abstract: Moral hazard complicates the design of an optimal benefit structure in a regulated social insurance program such as workers' compensation. We discuss the type of empirical information necessary to set optimal benefit levels in the presence of moral hazard. Since we present trends in indemnity and medical expenditures that indicate the presence of “claims rate moral hazard,” we develop and estimate a model of this type of moral hazard. We find evidence of moral hazard effects that are roughly consistent with those found elsewhere in the literature. We also present the first direct estimates of the impact of benefits on the output of the firm. We find that an increase in real benefits significantly decreases the output of the firm. This is consistent with notion that higher benefits induce more jobless spells and increase production costs using skilled labor. We close by illustrating how these estimates can be used to provide information on the feasible benefit schedule, given the presence of moral hazard.
TL;DR: In this paper, the authors compare the signaling games under public disclosure and no disclosure and show that welfare is likely reduced by disclosure, but if the regulator can adjust the stringency of relevant pollution regulations, then the loss in welfare can be smaller.
Abstract: This paper looks at whether a government regulator should publicly announce the amounts of pollution emitted by individual firms and plants. Disclosure may be important if there is incomplete information about firm costs, since pollution levels may be used by the regulated firm as a signal of costs to rival firms. We compare the signaling games under public disclosure and no disclosure. Welfare is likely reduced by disclosure, but if the regulator can adjust the stringency of the relevant pollution regulations, then the loss in welfare can be smaller. The implications of these results for pollution permits markets are discussed.