The Political Economy of (De)Regulation: Theory and Evidence from the US Electricity Industry.
45 Pages Posted: 31 Aug 2010 Last revised: 23 Sep 2019
There are 3 versions of this paper
The Political Economy of (De)Regulation: Theory and Evidence from the US Electricity Industry.
The Political Economy of (De)Regulation: Theory and Evidence from the US Electricity Industry.
The Political Economy of (De)Regulation: Theory and Evidence from the US Electricity Industry.
Date Written: July 1, 2019
Abstract
The choice of whether to regulate firms or to allow them to compete is key. If the demand is sufficiently inelastic, competition entails narrower allocative inefficiencies but, also, smaller expected profits and, thus, weaker incentives to invest in cost reduction. Hence, deregulation should be found where cost reduction is less socially relevant and consumers are more politically powerful, and it should produce lower expected costs only when investment is not sufficiently effective. These predictions hold true under several alternative assumptions and are consistent with data on the deregulation initiatives implemented in 43 US state electricity markets between 1981 and 1999 and on the operating costs of the plants that served these markets. To illustrate, deregulation prevailed where the marginal fossil fuel cost and the inefficiency of fuel usage had been the lowest and politicians were the most pro-consumer. Moreover, GMM estimates imply that deregulation lowered labor and fossil fuel expenses by pushing the most efficient firms to serve the market, but it did not reduce the inefficiency of fuel usage. These results help rationalize the slowdown of the deregulation wave and are robust to considering the other key drivers of deregulation, i.e., costly long-term wholesale contracts and excessive capacity accumulation.
Keywords: Regulation; Competition; Electricity; Political Biases
JEL Classification: L11; L51; L94; H11
Suggested Citation: Suggested Citation
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