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Measuring the Welfare Gains from Optimal Incentive Regulation

Author

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  • Jose Miguel Abito

Abstract

I empirically measure the welfare gains from optimal incentive regulation in the context of electric utilities facing both emissions and rate of return regulation (RORR). I provide evidence that RORR induces lower fuel efficiency, leading to greater coal consumption and higher emissions abatement costs. Replacing RORR with the optimal mechanism of Laffont and Tirole (1986) yields annual welfare gains of $686 million or a 11% reduction in electricity prices. I construct a much simpler two-contract menu that can achieve more than 65% of these welfare gains.

Suggested Citation

  • Jose Miguel Abito, 2020. "Measuring the Welfare Gains from Optimal Incentive Regulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(5), pages 2019-2048.
    • Handle: RePEc:oup:restud:v:87:y:2020:i:5:p:2019-2048.
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    File URL: http://hdl.handle.net/10.1093/restud/rdz050
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    Citations

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    Cited by:

    1. Abito, Jose Miguel & Knittel, Christopher R. & Metaxoglou, Konstantinos & Trindade, André, 2022. "The role of output reallocation and investment in coordinating environmental markets," International Journal of Industrial Organization, Elsevier, vol. 83(C).
    2. Lamy, Laurent & Patnam, Manasa & Visser, Michael, 2023. "Distinguishing incentive from selection effects in auction-determined contracts," Journal of Econometrics, Elsevier, vol. 235(2), pages 1172-1202.
    3. Garrett, Daniel F., 2021. "Payoff implications of incentive contracting," Theoretical Economics, Econometric Society, vol. 16(4), November.
    4. Ovaere, Marten, 2023. "Cost-efficiency and quality regulation of energy network utilities," Energy Economics, Elsevier, vol. 120(C).
    5. Scott E. Atkinson & Rong Luo, 2024. "Estimation Of Production Technologies With Output And Environmental Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 755-780, May.
    6. Wenjie Luo & Xunyong Xiang, 2024. "Unsynchronised Legislation and Unintended Pollution: Estimating Regulation-Induced Substitution in China," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(3), pages 731-760, March.
    7. An, Yonghong & Hong, Shengjie & Zhang, Daiqiang, 2023. "A structural analysis of simple contracts," Journal of Econometrics, Elsevier, vol. 236(2).
    8. Laurent Lamy & Manasa Patnam & Michael Visser, 2023. "Distinguishing incentive from selection effects in auction-determined contracts," Post-Print hal-04382099, HAL.

    More about this item

    Keywords

    Incentive regulation; Electric utilities; Emissions regulation; Mechanism design; Dynamic panel estimation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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