Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency

Authors: Fabrizio, Kira R.; Rose, Nancy L.; Wolfram, Catherine D.

Source: The American Economic Review, Volume 97, Number 4, September 2007 , pp. 1250-1277(28)

Publisher: American Economic Association

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Abstract:

While neoclassical models assume static cost-minimization by firms, agency models suggest that firms may not minimize costs in less-competitive or regulated environments. We test this using a transition from cost-of-service regulation to market-oriented environments for many US electric generating plants. Our estimates of input demand suggest that publicly owned plants, whose owners were largely insulated from these reforms, experienced the smallest efficiency gains, while investor-owned plants in states that restructured their wholesale electricity markets improved the most. The results suggest modest medium-term efficiency benefits from replacing regulated monopoly with a market-based industry structure.

Document Type: Research article

DOI: http://dx.doi.org/10.1257/000282807783286847

Publication date: 2007-09-01

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The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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