IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Yardstick Competition to Elicit Private Information: An Empirical Analysis of the Japanese Gas Distribution Industry

  • Ayako Suzuki

This study examines the effect of yardstick regulation in Japan's gas distribution sector, especially focusing on its effect of reducing the adverse selection problem. The Japanese government has regulated the price of city gas supplies by a combination of fixed-price regulation and ex-ante yardstick regulation. The yardstick compares a firm's reported costs wit those of "similar" firms before the price is determined.Realizing that yardstick inspection will lead the industry to a full-information outcome if it works perfectly, we infer its effect from the difference between the current and the counterfactual full-information welfare levels. We estimate the cost function of retail gas distributors under the assumption of asymmetric information between the regulator and the distributor in the efficient level of labor. The estimation allows us to obtain informational parameters such as firms' efficiency levels and effort levels. Using the estimated cost structure and the firms' behavior inresponse to the regulatory incentive, along with the demand system and the behavior of the regulator, we calculate the current and the hypothetical full-information welfare levels, and examine whether the discrepancy of the current level from the full-information one has been significantly reduced since the introduction of yardstick regulation. Our results suggest that, on average, yardstick regulation reduces welfare discrepancy, implying it is somewhat effective in reducing firms' incentive to report higher costs. This effect, however, comes mainly from the very first inspection conducted in 1995. There seems to be a dynamic problem, similar to the Ratchet effect, because subsequent inspections cannot be effective for a firm that has learned the relative position of its own cost in the comparison group.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.iser.osaka-u.ac.jp/library/dp/2008/DP0709.pdf
Download Restriction: no

Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0709.

as
in new window

Length:
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:dpr:wpaper:0709
Contact details of provider: Postal: 6-1 Mihogaoka, Ibaraki, Osaka 567-0047
Fax: 81-6-6879-8583
Web page: http://www.iser.osaka-u.ac.jp/index-e.html
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Potters, J.J.M. & Rockenbach, B. & Sadrieh, A. & van Damme, E.E.C., 2004. "Collusion under yardstick competition : An experimental study," Other publications TiSEM 2f5fc044-063c-477d-bf98-d, Tilburg University, School of Economics and Management.
  2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  3. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Gagnepain, P. & Ivaldi, M., 1999. "Incentive Regulatory Policies: the Case of Public Transit Systems in France," Papers 99.515, Toulouse - GREMAQ.
  5. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  6. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1989. "Production Frontiers With Cross-Sectinal And Time-Series Variation In Efficiency Levels," Working Papers 89-18, C.V. Starr Center for Applied Economics, New York University.
  7. Lewis, Tracy R & Sappington, David E M, 1988. "Regulating a Monopolist with Unknown Demand," American Economic Review, American Economic Association, vol. 78(5), pages 986-98, December.
  8. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
  9. Mehdi Farsi & Massimo Filippini, 2003. "Regulation and Measuring Cost Efficiency with Panel Data Models: Application to Electricity Distribution Utilities," CEPE Working paper series 03-19, CEPE Center for Energy Policy and Economics, ETH Zurich.
  10. Antonioli, B. & Filippini, M., 2001. "The use of a variable cost function in the regulation of the Italian water industry," Utilities Policy, Elsevier, vol. 10(3-4), pages 181-187.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:dpr:wpaper:0709. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fumiko Matsumoto)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.