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Yardstick Competition and Investment Incentives

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  • Dag Morten Dalen
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    Abstract

    This paper analyzes how firms' investment incentives are affected by yardstick competition in a situation in which the regulator is unable to commit himself to the regulatory contract before firms invest. Despite its rent-extracting property, yardstick competition does not necessarily reduce efficiency-improving investment. Considering firm-specific investment, yardstick competition is shown to increase investment incentives over individual regulation affirms. In this case, therefore, yardstick competition both reduces the regulator's informational problem ex post and strengthens the firms' investment incentives ex ante. If instead investment is industry-specific, incentives to invest are lowered by yardstick competition. Copyright (c) 1998 Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

    Volume (Year): 7 (1998)
    Issue (Month): 1 (03)
    Pages: 105-126

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    Handle: RePEc:bla:jemstr:v:7:y:1998:i:1:p:105-126

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    Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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    Web: http://www.blackwellpublishing.com/journal.asp?ref=1058-6407&site=1

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    Cited by:
    1. Facanha, Luis Otavio & Resende, Marcelo, 2004. "Price cap regulation, incentives and quality:: The case of Brazilian telecommunications," International Journal of Production Economics, Elsevier, vol. 92(2), pages 133-144, November.
    2. Georg Meran & Christian Hirschhausen, 2009. "A modified yardstick competition mechanism," Journal of Regulatory Economics, Springer, vol. 35(3), pages 223-245, June.
    3. Jamasb, Tooraj & Pollitt, Michael, 2007. "Incentive regulation of electricity distribution networks: Lessons of experience from Britain," Energy Policy, Elsevier, vol. 35(12), pages 6163-6187, December.
    4. Faure-Grimaud, Antoine & Reiche, Sönje Kerrin, 2003. "Dynamic Yardstick Regulation," CEPR Discussion Papers 4035, C.E.P.R. Discussion Papers.
    5. Jeffrey I. Bernstein & David E. M. Sappington, 1998. "Setting the X Factor in Price Cap Regulation Plans," NBER Working Papers 6622, National Bureau of Economic Research, Inc.
    6. Tangeras, T.P., 1999. "Collusion-Proof Yardstick Competition," Papers 674, Stockholm - International Economic Studies.
    7. Jeffrey Bernstein & Juan Hernandez & Jose Rodriguez & Agustin Ros, 2006. "X-Factor updating and total factor productivity growth: the case of peruvian telecommunications, 1996–2003," Journal of Regulatory Economics, Springer, vol. 30(3), pages 316-342, November.
    8. Tangerås, Thomas P., 2002. "Regulation of Cost and Quality under Yardstick Competition," Working Paper Series 573, Research Institute of Industrial Economics.
    9. Tupper, Henrique Cesar & Resende, Marcelo, 2004. "Efficiency and regulatory issues in the Brazilian water and sewage sector: an empirical study," Utilities Policy, Elsevier, vol. 12(1), pages 29-40, March.
    10. Meya, Johannes, 2013. "Dynamics of Yardstick Regulation: Historical Cost Data and the Ratchet E ffect," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79796, Verein für Socialpolitik / German Economic Association.
    11. Marques, Rui Cunha, 2006. "A yardstick competition model for Portuguese water and sewerage services regulation," Utilities Policy, Elsevier, vol. 14(3), pages 175-184, September.
    12. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, vol. 54(2), pages 316-335, February.
    13. Jamasb, Tooraj & Pollitt, Michael, 2008. "Reference models and incentive regulation of electricity distribution networks: An evaluation of Sweden's Network Performance Assessment Model (NPAM)," Energy Policy, Elsevier, vol. 36(5), pages 1788-1801, May.
    14. Resende, Marcelo, 2002. "Relative efficiency measurement and prospects for yardstick competition in Brazilian electricity distribution," Energy Policy, Elsevier, vol. 30(8), pages 637-647, June.
    15. Antoine Faure-Grimaud & Soenje Reiche, 2003. "Dynamic Yardstick Regulation," STICERD - Theoretical Economics Paper Series 459, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

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