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Low-powered vs high-powered incentives: Evidence from German electricity networks

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  • Hellwig, Michael
  • Schober, Dominik
  • Cabral, Luís

Abstract

We propose a difference-in-differences approach to estimating the impact of incentives on cost reduction in the context of German electricity networks. When subject to a lower-powered regulation mechanism, relatively more efficient operators pile up more costs in the year used to determine future prices. This pattern is consistent with the idea that incentives matter: higher-powered incentives lead to cost reduction. The results are also consistent with an equilibrium where more efficient firms pool with less efficient ones under the threat of ratcheting.

Suggested Citation

  • Hellwig, Michael & Schober, Dominik & Cabral, Luís, 2020. "Low-powered vs high-powered incentives: Evidence from German electricity networks," International Journal of Industrial Organization, Elsevier, vol. 73(C).
  • Handle: RePEc:eee:indorg:v:73:y:2020:i:c:s0167718720300096
    DOI: 10.1016/j.ijindorg.2020.102587
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    3. Waidelich, Paul & Haug, Tomas & Wieshammer, Lorenz, 2022. "German efficiency gone wrong: Unintended incentives arising from the gas TSOs’ benchmarking," Energy Policy, Elsevier, vol. 160(C).
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    6. Brown, David P. & Sappington, David E. M., 2023. "Designing Incentive Regulation in the Electricity Sector," Working Papers 2023-10, University of Alberta, Department of Economics.
    7. Farshchian, Ghazaleh & Darestani, Soroush Avakh & Hamidi, Naser, 2021. "Developing a decision-making dashboard for power losses attributes of Iran’s electricity distribution network," Energy, Elsevier, vol. 216(C).

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    More about this item

    Keywords

    Regulation; Ratchet effect; Electricity utilities; Difference-in-differences; Efficiency analysis;
    All these keywords.

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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