Essays on economic regulation

It is known that stock prices of public listed regulated companies react to price revisions by the regulator, and that the information conveyed by this price reaction might be used by the regulator on the contract design. This paper builds on Laffont and Tirole's (1986) regulation model with observable costs to better understand the effects the inclusion of the stock market can have on the regulator-regulated firm relationship. Our numerical simulations show that the inclusion of the market induce more powerful incentive schemes, with higher cost-reducing efforts, smaller informational rent by the firms and higher overall social welfare. In particular, we find that when the regulator is committed, the presence of short-term investors can make the first-best contract feasible, and that in the non-commitment case the market affects the firm's strategy by making it reveal more information about its cost than it normally would.

Economic regulation to supplement bidding for public works contracts

Includes bibliography

The relationship between motor carrier economic regulation and highway safety.

Transportation Department, Office of the Assistant Secretary for Policy and International Affairs, Washington, D.C.

Regulation in the Age of Globalization: The Difussion of Regulatory Agencies across Europe and Latin America

One of the most notable characteristics of the change in governance of the past two decades has been the restructuring of the state, most notably the delegation of authority from politicians and ministries to technocrats and regulatory agencies. Our unique dataset on the extent of these reforms in seven sectors in 36 countries reveals the widespread diffusion of these reforms in recent decades. In 1986 there were only 23 agencies across these sectors and countries (less than one agency per country); by 2002 this number had increased more than seven-fold, to 169. On average these 36 countries each have more than four agencies in the seven sectors studied. Yet the widespread diffusion of these reforms is characterized by cross-regional and cross-sectoral variations. Our data reveal two major variations: first, reforms are more widespread in economic regulation that in social spheres; second, regulatory agencies in the social spheres are more widespread in Europe than in Latin America. Why these variations in the spread of the reforms? In this paper we present for the first time the regulatory gaps across regions and sectors and then move on to offer some explanations for these gaps in a way that sheds some light on the nature of these reforms and on their limits. Our explanatory framework combines diffusion and structural explanations and in doing so sheds new light on the global diffusion of public policy ideas.

Performance benchmarking and incentive regulation – considerations of directing signals for electricity distribution companies

After the restructuring process of the power supply industry, which for instance in Finland took place in the mid-1990s, free competition was introduced for the production and sale of electricity. Nevertheless, natural monopolies are found to be the most efficient form of production in the transmission and distribution of electricity, and therefore such companies remained franchised monopolies. To prevent the misuse of the monopoly position and to guarantee the rights of the customers, regulation of these monopoly companies is required. One of the main objectives of the restructuring process has been to increase the cost efficiency of the industry. Simultaneously, demands for the service quality are increasing. Therefore, many regulatory frameworks are being, or have been, reshaped so that companies are provided with stronger incentives for efficiency and quality improvements. Performance benchmarking has in many cases a central role in the practical implementation of such incentive schemes. Economic regulation with performance benchmarking attached to it provides companies with directing signals that tend to affect their investment and maintenance strategies. Since the asset lifetimes in the electricity distribution are typically many decades, investment decisions have far-reaching technical and economic effects. This doctoral thesis addresses the directing signals of incentive regulation and performance benchmarking in the field of electricity distribution. The theory of efficiency measurement and the most common regulation models are presented. The chief contributions of this work are (1) a new kind of analysis of the regulatory framework, so that the actual directing signals of the regulation and benchmarking for the electricity distribution companies are evaluated, (2) developing the methodology and a software tool for analysing the directing signals of the regulation and benchmarking in the electricity distribution sector, and (3) analysing the real-life regulatory frameworks by the developed methodology and further develop regulation model from the viewpoint of the directing signals. The results of this study have played a key role in the development of the Finnish regulatory model.

Essays on regulation and risk

In this thesis, we investigate some aspects of the interplay between economic regulation and the risk of the regulated firm. In the first chapter, the main goal is to understand the implications a mainstream regulatory model (Laffont and Tirole, 1993) have on the systematic risk of the firm. We generalize the model in order to incorporate aggregate risk, and find that the optimal regulatory contract must be severely constrained in order to reproduce real-world systematic risk levels. We also consider the optimal profit-sharing mechanism, with an endogenous sharing rate, to explore the relationship between contract power and beta. We find results compatible with the available evidence that high-powered regimes impose more risk to the firm. In the second chapter, a joint work with Daniel Lima from the University of California, San Diego (UCSD), we start from the observation that regulated firms are subject to some regulatory practices that potentially affect the symmetry of the distribution of their future profits. If these practices are anticipated by investors in the stock market, the pattern of asymmetry in the empirical distribution of stock returns may differ among regulated and non-regulated companies. We review some recently proposed asymmetry measures that are robust to the empirical regularities of return data and use them to investigate whether there are meaningful differences in the distribution of asymmetry between these two groups of companies. In the third and last chapter, three different approaches to the capital asset pricing model of Kraus and Litzenberger (1976) are tested with recent Brazilian data and estimated using the generalized method of moments (GMM) as a unifying procedure. We find that ex-post stock returns generally exhibit statistically significant coskewness with the market portfolio, and hence are sensitive to squared market returns. However, while the theoretical ground for the preference for skewness is well established and fairly intuitive, we did not find supporting evidence that investors require a premium for supporting this risk factor in Brazil.

Regulation of the private provision of public water-related services

Includes bibliography

The impact of privatisation and regulation on the water and sewerage industry in England and Wales:a translog cost function approach

After the ten Regional Water Authorities (RWAs) of England and Wales were privatized in November 1989, the successor Water and Sewerage Companies (WASCs) faced a new regulatory regime that was designed to promote economic efficiency while simultaneously improving drinking water and environmental quality. As legally mandated quality improvements necessitated a costly capital investment programme, the industry's economic regulator, the Office of Water Services (Ofwat), implemented a retail price index (RPI)+K pricing system, which was designed to compensate the WASCs for their capital investment programme while also encouraging gains in economic efficiency. In order to analyse jointly the impact of privatization, as well as the impact of increasingly stringent economic and environmental regulation on the WASCs' economic performance, this paper estimates a translog multiple output cost function model for the period 1985–1999. Given the significant costs associated with water quality improvements, the model is augmented to include the impact of drinking water quality and environmental quality on total costs. The model is then employed to determine the extent of scale and scope economies in the water and sewerage industry, as well as the impact of privatization and economic regulation on economic efficiency.

Regulation of microgeneration and microgrids

The concept of microgrid (μGrid) has been emerging as a way to integrate microgeneration (μG) in low-voltage (LV) networks and simultaneously improve its potential benefits. Technical requirements to connect μgrids to LV networks have been studied in order to make this concept technologically feasible and safe to operate. However, the regulatory framework for economic integration of μG and μGrids on distribution systems, despite being crucial, is still an open issue. The main purpose of this paper is to contribute for the development of an appropriate economic regulation framework that removes the barriers to μG and μGrid development. To do so, the relevant costs and benefits resulting from the establishment of μG and μGrid are identified and a methodology for sharing those costs and benefits among the involved economic agents is presented. The only pre-requisite of such a methodology is the existence of a net benefit to all economic agents.

Path-dependence, expectativas e regulação econômica : elementos de análise a partir de uma perspectiva pós-keynesiana

O artigo busca fazer uma relação entre a ocorrência de path-dependence, a natureza expectacional do investimento e as flutuações econômicas, a partir de um referencial pós-keynesiano de análise. Em um ambiente não-ergódico, a fim de que o sistema tenha uma relativa estabilidade no tempo, a regulação econômica requer muito mais do que simples ajustamentos incrementais. Tornam-se necessárias, e possíveis, modificações qualitativas do sistema econômico. Tais modificações são analisadas a partir do conceito de bifurcação.

The new economy: Essays in network economics and two-sided markets

Following the Introduction, which surveys existing literature on the technology advances and regulation in telecommunications and on two-sided markets, we address specific issues on the industries of the New Economy, featured by the existence of network effects. We seek to explore how each one of these industries work, identify potential market failures and find new solutions at the economic regulation level promoting social welfare. In Chapter 1 we analyze a regulatory issue on access prices and investments in the telecommunications market. The existing literature on access prices and investment has pointed out that networks underinvest under a regime of mandatory access provision with a fixed access price per end-user. We propose a new access pricing rule, the indexation approach, i.e., the access price, per end-user, that network i pays to network j is function of the investment levels set by both networks. We show that the indexation can enhance economic efficiency beyond what is achieved with a fixed access price. In particular, access price indexation can simultaneously induce lower retail prices and higher investment and social welfare as compared to a fixed access pricing or a regulatory holidays regime. Furthermore, we provide sufficient conditions under which the indexation can implement the socially optimal investment or the Ramsey solution, which would be impossible to obtain under fixed access pricing. Our results contradict the notion that investment efficiency must be sacrificed for gains in pricing efficiency. In Chapter 2 we investigate the effect of regulations that limit advertising airtime on advertising quality and on social welfare. We show, first, that advertising time regulation may reduce the average quality of advertising broadcast on TV networks. Second, an advertising cap may reduce media platforms and firms' profits, while the net effect on viewers (subscribers) welfare is ambiguous because the ad quality reduction resulting from a regulatory cap o¤sets the subscribers direct gain from watching fewer ads. We find that if subscribers are sufficiently sensitive to ad quality, i.e., the ad quality reduction outweighs the direct effect of the cap, a cap may reduce social welfare. The welfare results suggest that a regulatory authority that is trying to increase welfare via regulation of the volume of advertising on TV might necessitate to also regulate advertising quality or, if regulating quality proves impractical, take the effect of advertising quality into consideration. 3 In Chapter 3 we investigate the rules that govern Electronic Payment Networks (EPNs). In EPNs the No-Surcharge Rule (NSR) requires that merchants charge at most the same amount for a payment card transaction as for cash. In this chapter, we analyze a three- party model (consumers, merchants, and a proprietary EPN) with endogenous transaction volumes and heterogenous merchants' transactional benefits of accepting cards to assess the welfare impacts of the NSR. We show that, if merchants are local monopolists and the network externalities from merchants to cardholders are sufficiently strong, with the exception of the EPN, all agents will be worse o¤ with the NSR, and therefore the NSR is socially undesirable. The positive role of the NSR in terms of improvement of retail price efficiency for cardholders is also highlighted.

Sähkönjakeluverkon komponenttien pitoajat

Suomessa sähkönjakeluverkkoyhtiöt toimivat verkkovastuualueillaan yksinoikeudella. Verkkovastuualuiden ominaispiirteet voivat olla hyvin erilaiset. Energiamarkkinavirasto valvoo sähkömarkkinalainsäädännön noudattamista jakeluverkkotoiminnassa. Jakeluverkonhaltijat on velvoitettu Energiamarkkinaviraston valvontamallin kautta määrittämään tiettyjen rajoitusten mukaisesti verkkokomponenteillensa sopivimmat teknistaloudelliset pitoajat. Nämä pitoajat vaikuttavat varsinkin verkkoyhtiön tuottomahdollisuuksiin ja asiakkaiden siirtohintoihin. Lisäksi huomioon on otettava jaettavan sähkön laatu, verkon käyttövarmuus sekä vaikutukset ympäristöön ja turvallisuuteen. Pitoaikojen matemaattinen mallintaminen on usein monimutkaista. Teknistaloudellinen pitoaika valitaankin monesti kokemuksen ja harkinnan perusteella. Tärkeimmät reunaehdot jakeluverkkokomponenttien teknistaloudellisten pitoaikojen valinnalle muodostavat verkkovastuualueen sähkönkulutuksen kasvun sekä infrastruktuurin muutoksen nopeudet. Hitaan muutoksen alueilla verkkokomponenttien teknistaloudelliset pitoajat lähenevät teknisiä pitoaikoja, joihin vaikuttavat voimakkaasti verkkovastuualueen maantieteelliset ja ilmastolliset ominaispiirteet. Yhtiöittäin vaihtelevat verkon rakennus- ja ylläpitomenetelmät tulee myös huomioida. Tässä diplomityössä keskitytään pääosin sähkönjakeluverkon komponenttien teknistaloudelliseen pitoaikaan verkon ja verkkovastuualueen ominaispiirteiden kautta. Aluksi määritellään jakeluverkon pitoaika usealla eri tavalla, sekä selvitetään pitoajan merkitystä nykytilanteessa. Lisäksi työn alkuosassa esitellään Energiamarkkinaviraston vuoden 2005 alusta käyttöönotettu jakeluverkkotoiminnan hinnoittelun kohtuullisuuden valvontamalli ja käydään läpi teknistaloudellisen pitoajan merkitys siinä. Sen jälkeen tarkastellaan jakeluverkkokomponenttien ja niiden osien tekniseen pitoaikaan vaikuttavia tekijöitä. Erityisesti puupylväisiin ja niihin liittyviin ajankohtaisiin asioihin kiinnitetään huomiota, koska puupylväät määräävät monesti koko ilmajohtorakenteen uusimisajankohdan. Lisäksi suolakyllästeiselle puupylväälle esitetään yleinen rappeutumismalli ja jakelumuuntajan rappeutumistapahtumaa tutkitaan. Lopuksi tarkastellaan Graninge Kainuu Oy:tä jakeluverkonhaltijana sekä määritetään sen verkkovastuualueelle ominaisia komponenttien teknisiä ja teknistaloudellisia pitoaikoja haastattelujen, tuoreimpien lähteiden, tutkimustulosten, vertailun ja harkinnan avulla.