Showing papers in "Journal of Regulatory Economics in 1999"
Nera1
TL;DR: In this paper, the authors examined the effects of privatization and competition on network expansion and efficiency using a fixed-effects model, and found that during the 1986-1995 time period, those countries that had at least fifty percent of the assets of their main telecommunications provider in the private sector had significantly higher main lines per 100 inhabitants and, to a lesser degree, had higher growth in main line per 100 residents.
Abstract: I use newly released data from the International Telecommunications Union to examine the effects of privatization and competition on network expansion and efficiency Using a fixed-effects model, I find that during the 1986-1995 time period, those countries that have at least fifty percent of the assets of their main telecommunications provider in the private sector have significantly higher main lines per 100 inhabitants and, to a lesser degree, have higher growth in main lines per 100 inhabitants There is no evidence, however, that privatization leads to higher growth in main lines per 100 inhabitants in those countries whose GDP per capita is less than $10,000 Privatization is positively associated with main lines per employee and growth in main lines per employee While competition is not found to affect network expansion, it is found to positively affect efficiency as measured in main lines per employee In order to account for the possible endogeneity of the privatization and competition dummy variables, all equations are estimated using an instrumental variable approach as well
309 citations
TL;DR: In this article, the authors review the relevant basic principles and then determine how to set the X factor: (1) when only a subset of the firm's products are subject to price-cap regulation, and when product-specific costs and productivity cannot be measured; (2) when changes in regulated prices affect the economywide inflation rate; and (3) in the presence of such structural changes as strengthened competitive forces.
Abstract: Despite the popularity of price-cap regulation in practice, the economic literature provides limited guidance on how to determine the X factor, which is the rate at which inflation-adjusted output prices must fall under price-cap plans. We review the relevant basic principles, and then determine how to set the X factor: (1) when only a subset of the firm's products are subject to price-cap regulation, and when product-specific costs and productivity cannot be measured; (2) when changes in regulated prices affect the economy-wide inflation rate; and (3) in the presence of such structural changes as strengthened competitive forces.
120 citations
TL;DR: In this paper, the authors examined the optimal output taxes for polluting oligopolists under endogenous market structure, in the presence of external costs that vary exogenously with aggregate output.
Abstract: This paper examines the optimal output taxes for polluting oligopolists under endogenous market structure, in the presence of external costs that vary exogenously with aggregate output. For general functional forms, we show that (i) the equilibrium number of firms in an industry may differ from the socially optimal number of firms and (ii) the second-best optimal taxes under imperfect competition could be less than, equal to, or greater than marginal external damages depending upon the curvature of market demand.
87 citations
TL;DR: In this article, the authors model the dynamic behavior of prices in a network of interconnected, but decentralized, electric power markets, and estimate dynamic equations of unregulated, wholesale power prices at spot markets scattered over an eleven-state trading region.
Abstract: In this paper, we model the dynamic behavior of prices in a network of interconnected, but decentralized, electric power markets—an architecture very different from the centralized exchanges and power pools currently being implemented by many state regulators. We estimate dynamic equations of unregulated, wholesale power prices at spot markets scattered over an eleven-state trading region. The results indicate that this decentralized system of power and transmission trading produces prices that are efficient and dynamically stable over this vast network. Price convergence in the power market is similar to what has been observed in the recently deregulated natural gas market.
64 citations
TL;DR: In this article, the impact of the Fair Credit and Charge Card Disclosure Act of 1988 on the performance of the credit card industry was examined. But the authors concluded that the Act failed to achieve its intended purpose.
Abstract: Theoretical studies have questioned the efficacy of mandatory disclosure requirements under various conditions, but empirical studies of disclosure requirements have been rare. This paper tests the impact of the Fair Credit and Charge Card Disclosure Act of 1988, enacted specifically to increase the degree of competition in the credit card industry in the face of suspected consumer search costs. The findings suggest that the Act failed to achieve its intended purpose.
56 citations
TL;DR: In this paper, the authors estimate economies of scale for a large panel of GTE Wireless cellular market areas and show that scale economies exist throughout the system and provide a rationale for the industry trend of consolidation.
Abstract: Strategic positioning and potential cost savings are popular explanations for growing consolidation in the wireless telephone industry. This research estimates economies of scale for a large panel of GTE Wireless cellular market areas. Contrary to previous findings, our results indicate scale economies exist throughout the system and provide a rationale for the industry trend of consolidation.
50 citations
TL;DR: In an effort to reduce operating deficits, increase productivity, and improve the quality of services, the public transit sector has been moving away from public ownership and operation and towards a franchising arrangement whereby a local government authorizes a private firm to manage and operate the city's public transit system.
Abstract: In an effort to reduce operating deficits, increase productivity, and improve the quality of services, the public transit sector has been moving away from public ownership and operation and towards a franchising arrangement whereby a local government authorizes a private firm to manage and operate the city's public transit system. Profit maximization considerations imply that private managers have stronger incentives for cost efficiency. One such example is the city of Indianapolis which began privatization efforts in its transit operations in 1996. Based upon monthly data from January 1991 through March 1997, this study examines the effect of privatization on the city's cost of providing mass transit. The primary implication of the study is that Indianapolis has experienced an annual 2.5% reduction in operating costs since privatizing the management of its public transit system.
44 citations
TL;DR: In this paper, the authors model the asset beta and show that it (and the equity beta) are a function of several variables beyond those found in previous tests and find evidence consistent with the Peltzman buffering hypothesis and the model of beta.
Abstract: Many tests of the Peltzman hypothesis that regulation buffers the firm's cash flows examine the firm's equity beta. We model the asset beta and show that it (and the equity beta) are a function of several variables beyond those found in previous tests. Since these variables are also affected by regulation, tests of the Peltzman theory that do not hold these factors constant will be biased. The empirical tests in this paper hold other determinants of beta equal and find evidence consistent with the Peltzman buffering hypothesis and the model of beta.
41 citations
TL;DR: In this paper, the role of costs, competition, and income disparities in settlement rate determination between international telecommunication carriers has been investigated and the implications for the FCC's recently proposed settlement rate caps, as well as for proposals for multilateral solutions.
Abstract: This paper models settlement arrangements between international telecommunication carriers. The FCC in the United States claims these arrangements cost United States consumers billions of dollars annually, largely to subsidize foreign carriers in low-income countries. A model is given which makes sense of this claim, as well as the role of costs, competition, and income disparities in settlement rate determination. Findings are tested using data spanning 17 years and 167 countries. Some implications are drawn for the FCC's recently proposed settlement rate caps, as well as for proposals for multilateral solutions.
40 citations
TL;DR: In this article, the authors proposed a model for the second-price rules for bidding and transfer of assets when the incumbent loses the bid at re-auction, to address concerns of hold-up and opportunistic behavior in the event of a change in franchisee.
Abstract: The idea of franchise bidding, as a governance structure for regulating natural monopoly, has remained dormant for the last twenty years, during which the technology and regulation of natural monopoly has changed considerably, both in theory and in practice. Meanwhile, auction theory has advanced significantly, independently of regulatory economics, which has moved in a different direction, namely price-cap regulation. We seek to combine the effects of the changes in the technology of network industries and the advances in bidding theory and in regulatory economics toward the development of a rigorous model of franchise bidding. The model presented in this paper, which develops conditions for efficient outcomes, provides a benchmark to begin a reconsideration of the potential of franchise bidding. In particular, for the first time, we complete Demsetz' (1968) proposal by specifying (second-price) rules for bidding and for transfer of assets when the incumbent loses the bid at re-auction. The scheme features one bid determining simultaneously output pricing and asset transfer pricing, to address concerns of hold-up and opportunistic behavior in the event of a change in franchisee.
38 citations
TL;DR: The authors empirically show how self-selecting tariffs with basic and OCP (Optional Calling Plan) service options affect households' calling patterns and usage of interstate toll service in the United States.
Abstract: Using a nested logit model, we empirically show how self-selecting tariffs with basic and OCP (Optional Calling Plan) service options affect households' calling patterns and usage of interstate toll service in the United States We find, first, that households are more sensitive to price declines than to price increases in terms of both consumption and expenditures Second, households respond more sensitively to OCP price changes than to basic service price changes Third, consumption changes are more sensitive than expenditures, indicating that households adjust their calling patterns or service options so as to keep expenditures on telephone bills relatively constant
TL;DR: In this article, the authors derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices, and then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolists's cost report to the regulator.
Abstract: A natural monopolist whose cost is private information produces a good which is combined with another good that can be produced by the monopolist or by other firms. The agency that regulates the monopolist can impose any of several different market structures in the industry: integrated monopoly, vertical separation with free entry downstream, or liberalization downstream (both integrated and independent production). When several firms produce downstream, a Cournot quantity-setting game with free entry determines the market price. We derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices. We then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolist's cost report to the regulator. The optimal regulatory policy awards a monopoly to a low-cost upstream firm, but requires free entry downstream if the monopolist reports high upstream costs. Thus, the choice of market structure is an additional tool to limit rent extraction by the monopolist. Simulation analysis reveals the possibility of significant welfare gains from this additional regulatory tool.
TL;DR: In this paper, the effects of deregulation, a change in the traffic characteristics, miles of road, and consolidation, on employment by Class I railroads were investigated, and it was found that the largest employment declines emanate from the direct effect of partial deregulation, while smaller, but still large, employment declines were due to mergers and changes in traffic mix.
Abstract: Since 1978, there have been dramatic changes in the railroad industry with partial deregulation, a massive consolidation of firms, a reduction in the size of the rail network, and a dramatic reduction in employment. In this paper, we focus on the effects of deregulation, a change in the traffic characteristics, miles of road, and consolidation, on employment by Class I railroads. We develop and estimate a model that allows these effects to be identified, finding that the largest employment declines emanate from the direct effect of partial deregulation, while smaller, but still large, employment declines emanate from mergers and changes in traffic mix.
TL;DR: In this paper, the authors test a model of states' adoption of the hazardous waste liability regime (negligence, strict liability) providing greater net benefits, and find that the likelihood of adopting strict liability increases in a state's number of chemical-intensive manufacturing plants, decreases in the number of large mining establishments.
Abstract: We test a model of states' adoption of the hazardous waste liability regime (negligence, strict liability) providing greater net benefits. The likelihood of adopting strict liability increases in a state's number of chemical-intensive manufacturing plants, decreases in the number of large mining establishments. Also predictive: severity of state's hazardous waste problem, effectiveness of other state environmental programs, and political climate. States may view strict liability as better for industrial than mining pollution, and may be partly motivated by "precaution targeting" and "deep pockets" mentality. Non-adopters may wish not to discourage business or have other programs that substitute for strict liability.
TL;DR: In this article, the effect of states' licensing requirements for certified public accountant (CPAs) was examined by extending the literature on occupational licensing, and the results showed no association between audit quality and variations in regulatory strictness.
Abstract: This paper extends the literature on occupational licensing by examining the effect of states' licensing requirements for Certified Public Accountants (CPAs). We related variations in licensing requirements across states to CPA firm based assessments of service quality. Based upon prior research, we also examined the relationship between service quality and a market generated quality indicator: CPA firm size. The results show no association between audit quality and variations in regulatory strictness. However, a positive relationship was found between audit quality and firm size, suggesting that market forces, rather than governmental intervention, is effective in addressing the information asymmetry that can exist between CPAs and their clients.
TL;DR: In this paper, the authors discuss the way to test for the impact of regulation on firm value and required return in an event study, and illustrate with an examination of the 1971 radio and television cigarette advertising ban, and find results at odds with those of an earlier study.
Abstract: Questions concerning the effects of regulation on stock returns are important to regulators and investors. Analysts must carefully design and interpret tests of hypotheses regarding these effects because of the nature of the regulatory process and financial markets. I discuss the way to test for the impact of regulation on firm value and required return in an event study. I illustrate with an examination of the 1971 radio and television cigarette advertising ban, and find results at odds with those of an earlier study.
TL;DR: When health care sponsors can use "utilization reviews" in order to indicate to the provider what type of treatment to administer to the patient based upon a diagnosis that is established by the provider, it is possible to implement the "first best" levels of investment in cost control efforts and in aggressiveness of treatment.
Abstract: When health care sponsors such as HMOs or PPOs can use "utilization reviews" in order to indicate to the provider what type of treatment to administer to the patient based upon a diagnosis that is established by the provider, it is possible to implement the "first best" levels of investment in cost control efforts and in aggressiveness of treatment. The implementation of the "first best" requires the utilization of the prospective reimbursement rule accompanied by the removal of all malpractice liabilities from the provider. In contrast, when the type of treatment cannot be enforced by the payer, implementation of the "first best" is not feasible if the payer places a higher weight on the welfare of consumers than that of providers in its objective function. In this case, the reimbursement scheme deviates from the prospective rule, and the provider assumes liability to part of the cost incurred by society as a result of unsuccessful medical outcomes. When the payer can enforce treatment only partially by establishing bounds on the range of acceptable treatments, a minimal acceptable standard will be established and the outcome will be an intermediate case between the above two extremes.
TL;DR: In this article, the impact of restructuring on local gas distribution utilities' residential, commercial, and industrial prices is examined, and the authors provide an empirical examination of the impact that restructuring has on local distribution utilities.
Abstract: The natural gas industry has witnessed significant policy changes since 1978. The Federal Energy Regulatory Commission has undertaken a number of policy initiatives designed to promote competition in the natural gas industry. These initiatives have affected both natural gas pipeline and local gas distribution companies. This study provides an empirical examination of the impact of restructuring on local gas distribution utilities' residential, commercial, and industrial prices.
TL;DR: In this paper, the authors present a methodology for estimating both marginal and incremental costs for postal products, combining micro-unit accounting data and econometric estimation of the cost structure.
Abstract: Regulators are often faced with the challenge of both setting efficient prices and avoiding cross subsidy. Successful implementation of these goals requires estimates of both marginal costs and incremental costs. We present a methodology for estimating both marginal and incremental costs for postal products. The proposed algorithms combine micro-unit accounting data and econometric estimation of the cost structure. We apply the methodology to the U.S. Postal Service and produce estimates of marginal and incremental costs for eighteen postal products and incremental costs for another four groups of products.
TL;DR: In this article, the authors characterize the regulatory incumbent's incentive to invest when a deregulation process is initiated and an unregulated firm enters the market as a result, and present conditions under which deregulation enhances welfare.
Abstract: We study the investment incentives of a regulated, incumbent firm in a deregulation process. The regulator cannot commit to a long-term regulatory policy, and investment decisions are taken before optimal regulatory policies are imposed. We characterize the regulated incumbent's incentive to invest when a deregulation process is initiated and an unregulated firm enters the market as a result. The change in the marginal return to investment depends on how the investment changes the firm's virtual cost—the sum of its physical production and information costs. When the marginal return to investment increases due to deregulation, social welfare increases as a result of higher investment and more competition. Otherwise, the change in social welfare depends on the total of the effects in the fall of investment and increased competition. We also present conditions under which deregulation enhances welfare.
TL;DR: In this article, the authors investigated profit-maximizing conservation incentives of a utility, where the interest in conservation results from prices regulated below the marginal costs of supply and where consumers differ with respect to their subjective time preference.
Abstract: This paper investigates profit-maximizing conservation incentives of a utility, where the interest in conservation results from prices regulated below the marginal costs of supply and where consumers differ with respect to their subjective time preference. Conventional least-cost planning implies that a program should focus on inefficient consumers (those who apply high discount rates). However, this scheme provokes strategic reactions of the consumers. Hence, incentive-compatible conservation schemes-one tied to efficiency, the other tied to electricity consumption-are derived that differ starkly from the above finding and from actual programs.
TL;DR: The authors examined if asymmetric information about earnings prospects caused low-capital banks to reduce assets rather than raise capital between 1989 and 1992, the transition period from the leverage ratio to the risk-based capital requirement.
Abstract: This paper examines if asymmetric information about earnings prospects caused low-capital banks to reduce assets rather than raise capital between 1989 and 1992, the transition period from the leverage ratio to the risk-based capital requirement. The measure of asymmetric information here is the residual of an earnings prediction model based on publicly available information. If managers are significantly better informed than outside investors, a large residual indicates that inside information is more favorable and that the bank's stock is undervalued. The empirical results show an insignificant effect of asymmetric information on banks' portfolio decisions.
TL;DR: In this paper, the authors compare the access to an essential facility in two different property rights regimes, where the owner of the facility has an unrestricted private property right of the essential facility and access is regulated according to the efficient component pricing rule.
Abstract: In this paper, we compare the access to an essential facility in two different property rights regimes. In the first, the owner of the facility has an unrestricted private property right of the essential facility. In the second, access is regulated according to the efficient component pricing rule. Proponents of the second regime claim that this rule is efficient, for it forecloses the complementary market only to inefficient producers. We prove that, as far as entry is concerned, the two legal frameworks are equivalent if we do not consider the possibility of the transfer of the property right, and that if this is allowed the efficient component pricing rule might exclude efficient suppliers.
TL;DR: In this paper, the authors proposed a new scheme complementing the current accounting rate system for international telecommunications industries, taking into account the utilization of a subsidy from a developed country to a less developed country.
Abstract: This paper proposes a new scheme complementing the current accounting rate system for international telecommunications industries. From an economic standpoint, the current accounting rate system results in high service charges as well as inefficient production. This is a source of contention between developed countries and less developed countries. Although there have been discussions concerning the disadvantages of the accounting rate system, a concrete and workable alternative has not yet been proposed. In this paper, we shall propose a method, taking into account the utilization of a subsidy from a developed country to a less developed country to reduce the accounting rate in international telecommunications, and this scheme brings a second-best solution.
TL;DR: In this paper, the authors investigate the economic effects of callback services and show that it can arise either from the inefficiency of domestic markets or from the accounting rate which is far from cost-based.
Abstract: This paper investigates the economic effects of callback services, an issue which has previously brought much disputes and conflicts. Whereas the existence of callback services has been attributed to a rate disparity between countries, we show that it can arise either from the inefficiency of domestic markets or from the accounting rate which is far from cost-based. Although callback service is an inefficient means of utilizing resources, its introduction may lead the international telephony markets in an efficient direction when inefficiencies exist in the market. It also helps us understand why conflicts occur among the agents with respect to the legitimacy of callback services by comparing the international telephony markets before and after the introduction of callback services.
TL;DR: In this paper, the authors show that commonly used avoided cost rules, which evaluate investment alternatives by comparing their costs to forecasts of future expected cost, are fundamentally flawed for choosing local area investments in distribution capacity.
Abstract: We show that commonly used "avoided cost" rules, which evaluate investment alternatives by comparing their costs to forecasts of future expected cost, are fundamentally flawed for choosing local area investments in distribution capacity. Use of avoided cost rules: 1) confuses cost-effectiveness tests with benefit-cost tests; 2) makes inappropriate marginal comparisons and violates necessary optimality conditions because of the "lumpy" nature of many distribution system investments; 3) fails to incorporate the effects of uncertainty properly; 4) necessarily leads to excess deferral or traditional distribution capacity investments with distributed generation and DSM investments; and 5) does not lead to lowest expected cost investment plans. We conclude by outlining a more appropriate approach to evaluating distribution investments based on evaluations of actual cash flows associated with investment alternatives under uncertainty.
TL;DR: In this article, the authors describe how direct access load profiling can be implemented, discusses the technical challenges, and reports the results of a simulation study, and describe how to implement load profiling for small customers.
Abstract: In numerous places, events are rapidly leading to the development of regional power exchanges with visible hourly prices, which are open to purchases by "direct access" customers. Currently, the vast majority of smaller customers have meters that are not capable of recording hourly usage, so that these customers are effectively precluded from power exchange purchases. Load profiling is frequently suggested as an alternative to installation of hourly usage meters, which will allow smaller customers to participate in direct access. This article describes how direct access load profiling can be implemented, discusses the technical challenges, and reports the results of a simulation study.
TL;DR: In this paper, a simple two-period model is used to analyze the role played by the timing anticipation of deregulation in the decision making of potential self-generators and for limit-contract pricing of local utilities.
Abstract: Due to uncertainty in the timing of deregulation for electric power generation, large and potentially self-generating consumers should consider a lost option value as part of the cost of any investment they consider. This paper uses a simple two-period model to analyze the role played by the timing anticipation of deregulation in the decision making of potential self-generators (PSGs) and for limit-contract pricing of local utilities. We develop an effective limit-pricing rule and conclude that a higher-probability of early deregulation will lead utilities to retain more consumers and to set higher limit prices before deregulation. A possible early deregulation might not harm utilities; it could even benefit utilities in finite lifetime periods. Finally, a simulation is provided which supports our main results and shows that the effects on utilities' expected profits of uncertainty about the coming deregulation will depend on the distribution of consumer types.