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Yardstick Competition and Investment Incentives

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  • Dag Morten Dalen

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.

Suggested Citation

  • Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, March.
  • Handle: RePEc:bla:jemstr:v:7:y:1998:i:1:p:105-126
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    Cited by:

    1. Bernstein, Jeffrey I & Sappington, David E M, 1999. "Setting the X Factor in Price-Cap Regulation Plans," Journal of Regulatory Economics, Springer, vol. 16(1), pages 5-25, July.
    2. Cullmann, Astrid & Nieswand, Maria, 2016. "Regulation and investment incentives in electricity distribution: An empirical assessment," Energy Economics, Elsevier, vol. 57(C), pages 192-203.
    3. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, vol. 54(2), pages 316-335, February.
    4. Jeffrey Bernstein & Juan Hernandez & Jose Rodriguez & Agustin Ros, 2007. "X-factor updating and total factor productivity growth: the case of peruvian telecommunications, 1996–2003," Journal of Regulatory Economics, Springer, vol. 31(3), pages 355-355, June.
    5. 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.
    6. Cullmann, Astrid & Nieswand, Maria, 2015. "Regulation and Investment Incentives in Electricity Distribution," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113090, Verein für Socialpolitik / German Economic Association.
    7. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    8. Georg Meran & Christian Hirschhausen, 2009. "A modified yardstick competition mechanism," Journal of Regulatory Economics, Springer, vol. 35(3), pages 223-245, June.
    9. Tangerås, Thomas P., 2002. "Regulation of Cost and Quality under Yardstick Competition," Working Paper Series 573, Research Institute of Industrial Economics.
    10. 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.
    11. Tangeras, Thomas P., 2002. "Collusion-proof yardstick competition," Journal of Public Economics, Elsevier, vol. 83(2), pages 231-254, February.
    12. 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.
    13. 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.
    14. Faure-Grimaud, Antoine & Reiche, Sönje Kerrin, 2003. "Dynamic Yardstick Regulation," CEPR Discussion Papers 4035, C.E.P.R. Discussion Papers.
    15. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    16. TEUSCH, Jonas, 2016. "Merger Incentives Under Yardstick Competition : a Theoretical Model," CORE Discussion Papers 2016037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    17. 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.
    18. Dominique Bouf & Julien Lévêque, 2006. "Yardstick Competition for Transport Infrastructure Services," Post-Print halshs-00092671, HAL.
    19. 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.
    20. Faure-Grimaud, Antoine & Reiche, Sonje, 2003. "Dynamic yardstick regulation," LSE Research Online Documents on Economics 19319, London School of Economics and Political Science, LSE Library.
    21. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    22. 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.
    23. Lefouili, Yassine, 2015. "Does competition spur innovation? The case of yardstick competition," Economics Letters, Elsevier, vol. 137(C), pages 135-139.
    24. 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.

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