[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/aut/wpaper/201505.html
   My bibliography  Save this paper

Incentives, Efficiency and Quality in Regulated Monopolies under Customer Ownership

Author

Listed:
  • Richard Meade

    (Department of Economics, Auckland University of Technology)

Abstract
We extend the theory of monopoly regulation under imperfect information to the case of customer, rather than investor, ownership. The firm's manager can exert two types of effort - a contractible effort to reduce costs, and a non-contractible effort to increase quality. The former decreases expected costs and increases expected profits, while the latter increases expected demand, costs and consumer surplus. We show that the manager faces a conflict between pursuing cost reductions and quality when his or her net marginal disutility of cost-reducing effort is sufficiently increased by quality-enhancing effort. We further show that this conflict can arise even without an effort substitution effect. Thus stronger incentives (i.e. a higher managerial profit share) induce greater cost-reducing effort, but lower quality-enhancing effort. Since customer owners value consumer surplus as well as profits, they optimally provide the manager with weaker incentives than investor owners - who only value profits - for a given regulated price. This implies higher quality but lower efficiency under customer ownership, given price. A customer-owned firm is optimally set a tighter price cap than an investor-owned firm if its profits are less price-sensitive than is relative consumer surplus. This can result in quality differences being reduced between ownership types, but with ambiguous impacts on efficiency differences. Failure to account for ownership-related differences in objective functions gives rise to regulatory distortions.

Suggested Citation

  • Richard Meade, 2015. "Incentives, Efficiency and Quality in Regulated Monopolies under Customer Ownership," Working Papers 2015-05, Auckland University of Technology, Department of Economics.
    • Handle: RePEc:aut:wpaper:201505
    as

    Download full text from publisher

    File URL: https://www.aut.ac.nz/__data/assets/pdf_file/0013/108022/Economics-WP-2015-05.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Christian Growitsch & Tooraj Jamasb & Michael Pollitt, 2009. "Quality of service, efficiency and scale in network industries: an analysis of European electricity distribution," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2555-2570.
    2. Talosaga, Talosaga & Howell, Bronwyn, 2012. "New Zealand's Electricity Lines Companies: An Ownership Analysis," Working Paper Series 4127, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Armstrong, Mark & Porter, Robert, 2007. "Preface to the Handbook of Industrial Organization, Volume 3," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 0, pages 00, Elsevier.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, April.
    5. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, April.
    6. Roland Bénabou & Jean Tirole, 2016. "Bonus Culture: Competitive Pay, Screening, and Multitasking," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 305-370.
    7. Patrick HERBST & Jens PRUFER, 2016. "Firms, Nonprofits, And Cooperatives: A Theory Of Organizational Choice," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 87(3), pages 315-343, December.
    8. Mark Armstrong & Robert Porter (ed.), 2007. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 3, number 1.
    9. Hart, Oliver & Moore, John, 1998. "Cooperatives vs. outside ownership," LSE Research Online Documents on Economics 19360, London School of Economics and Political Science, LSE Library.
    10. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, April.
    11. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-362, March.
    12. Michael Kopel & Marco A. Marini, 2012. "Optimal Compensation Structure in Consumer Cooperatives under Mixed Oligopoly," DIS Technical Reports 2012-06, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    13. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    14. George W. J. Hendrikse, 1998. "Screening, Competition and the Choice of the Cooperative as an Organisational Form," Journal of Agricultural Economics, Wiley Blackwell, vol. 49(2), pages 202-217, June.
    15. Hart, Oliver & Moore, John, 1996. "The Governance of Exchanges: Members' Cooperatives versus Outside Ownership," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 12(4), pages 53-69, Winter.
    16. Le Prou, Rene, 2007. "The Administration of New Zealand Irrigation: History and Analysis," Working Paper Series 4341, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    17. Joel S. Demski & David E.M. Sappington, 1987. "Hierarchical Regulatory Control," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 369-383, Autumn.
    18. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    19. Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(02), pages 3-9, July.
    20. repec:bla:econom:v:43:y:1976:i:17:p:127-37 is not listed on IDEAS
    21. Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(2), pages 3-9, 07.
    22. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    23. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    24. Le, Rene Prou, 2007. "The Administration of New Zealand Irrigation: History and Analysis," Working Paper Series 3954, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    25. Spiller, Pablo T, 1990. "Politicians, Interest Groups, and Regulators: A Multiple-Principals Agency Theory of Regulation, or "Let Them Be Bribed."," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 65-101, April.
    26. Evans, Lewis & Meade, Richard, 2005. "The Role and Significance of Cooperatives in New Zealand Agriculture, A Comparative Institutional Analysis," Working Paper Series 3847, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    27. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
    28. Kirubi, Charles & Jacobson, Arne & Kammen, Daniel M. & Mills, Andrew, 2009. "Community-Based Electric Micro-Grids Can Contribute to Rural Development: Evidence from Kenya," World Development, Elsevier, vol. 37(7), pages 1208-1221, July.
    29. Sexton, Richard J. & Iskow, Julie, 1993. "What Do We Know About the Economic Efficiency of Cooperatives: An Evaluative Survey," Journal of Agricultural Cooperation, National Council of Farmer Cooperatives, vol. 8, pages 1-13.
    30. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    31. repec:ces:ifodic:v:4:y:2006:i:2:p:14567496 is not listed on IDEAS
    32. Talosaga, Talosaga & Howell, Bronwyn, 2012. "New Zealand's Electricity Lines Companies: An Ownership Analysis," Working Paper Series 4119, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    33. Lucas W. Davis, 2008. "Durable goods and residential demand for energy and water: evidence from a field trial," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 530-546, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. M. Girotti & R. Meade, 2017. "U.S. Savings Banks' Demutualization and Depositor Welfare," Working papers 639, Banque de France.
    2. Ovaere, Marten, 2023. "Cost-efficiency and quality regulation of energy network utilities," Energy Economics, Elsevier, vol. 120(C).
    3. Richard Meade & Magnus Soderberg, 2017. "Welfare-Maximising Investors? – Utility Firm Performance with Heterogeneous Quality Preferences and Endogenous Ownership," Working Papers 2017-09, Auckland University of Technology, Department of Economics.
    4. Leroux, Anke & Söderberg, Magnus, 2023. "Network Regulation under electoral competition," Energy Economics, Elsevier, vol. 120(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    2. 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.
    3. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
    4. Ovaere, Marten, 2023. "Cost-efficiency and quality regulation of energy network utilities," Energy Economics, Elsevier, vol. 120(C).
    5. Agrell, Per J. & Bogetoft, Peter & Mikkers, Misja, 2013. "Smart-grid investments, regulation and organization," Energy Policy, Elsevier, vol. 52(C), pages 656-666.
    6. Nepal, Rabindra & Jamasb, Tooraj, 2015. "Incentive regulation and utility benchmarking for electricity network security," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 117-127.
    7. David E. M. Sappington & Dennis L. Weisman, 2016. "The disparate adoption of price cap regulation in the U.S. telecommunications and electricity sectors," Journal of Regulatory Economics, Springer, vol. 49(2), pages 250-264, April.
    8. Moszoro Marian W., 2016. "Coasean Quality of Regulated Goods," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(4), pages 1-13, October.
    9. Vogel, Philip, 2009. "Efficient investment signals for distributed generation," Energy Policy, Elsevier, vol. 37(9), pages 3665-3672, September.
    10. Richard Meade & Magnus Soderberg, 2017. "Welfare-Maximising Investors? – Utility Firm Performance with Heterogeneous Quality Preferences and Endogenous Ownership," Working Papers 2017-09, Auckland University of Technology, Department of Economics.
    11. Bertsch, Joachim & Hagspiel, Simeon, 2015. "Regulation of non-marketed outputs and substitutable inputs," EWI Working Papers 2015-6, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    12. 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.
    13. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2018. "A theory of grand innovation prizes," Research Policy, Elsevier, vol. 47(2), pages 343-362.
    14. Jamasb, Tooraj & Orea, Luis & Pollitt, Michael, 2012. "Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies," Energy Economics, Elsevier, vol. 34(5), pages 1498-1506.
    15. Richard Schmalensee, 2012. "“On a Level with Dentists?” Reflections on the Evolution of Industrial Organization," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 41(3), pages 157-179, November.
    16. Donze, Jocelyn & Gunnes, Trude, 2018. "Becoming “We” instead of “I”, identity management and incentives in the workplace," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 105-120.
    17. repec:diw:diwwpp:dp1696 is not listed on IDEAS
    18. Dewatripont, Mathias & Legros, Patrick, 2005. "Public-private partnerships: contract design and risk transfer," EIB Papers 5/2005, European Investment Bank, Economics Department.
    19. Ariel Casarin, 2014. "Productivity throughout regulatory cycles in gas utilities," Journal of Regulatory Economics, Springer, vol. 45(2), pages 115-137, April.
    20. Gómez, Tomás & Mateo, Carlos & Sánchez, Álvaro & Reneses, Javier & Rivier, Michel, 2011. "La retribución de la distribución de electricidad en España y el modelo de red de referencia/The Remuneration of Electricity Distribution in Spain and the Reference Network Model," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 29, pages 661(24.)-66, Agosto.
    21. Escobar, Juan F. & Pulgar, Carlos, 2017. "Motivating with simple contracts," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 192-214.

    More about this item

    Keywords

    Regulation; Moral Hazard; Cooperatives; Electric Utilities; Gas; Water Utilities; Profit Sharing;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • P13 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Cooperative Enterprises

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aut:wpaper:201505. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gail Pacheco (email available below). General contact details of provider: https://edirc.repec.org/data/fbautnz.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.