An Assessment of X-Efficiency Gained Through Competition

Primeaux, Walter J.

doi:10.2307/1924909

Cited by 99 publications

(30 citation statements)

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“…These may be interpreted as the medium-run efficiency gains that Joskow (1997, p. 214) posits "may be associated with improving the operating 5 Some hint of this possibility in electricity is provided by Walter J. Primeaux (1977), who compared a sample of municipally owned firms facing competition to a matched sample of municipally owned firms in monopoly situations and found a significant decrease in costs per kWh for firms facing competition. 6 Joskow (1997) describes the significant labor force reductions that accompanied restructuring in the UK, as the industry moved from state-owned monopoly to a privatized, competitive generation market, although these mix restructuring and privatization effects.…”

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confidence: 99%

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

Markiewicz

Rose

Wolfram

2007

American Economic Review

328

271

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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 U.S. 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. Keywords:Competition; Efficiency; Restructuring; Regulation; Deregulation; Electric Utilities. JEL Codes: JEL L51, L11, L94, L22. * Fabrizio: Assistant Professor of Organization & Management, Goizueta Business School, Emory University, 1300 Clifton Road NE, Atlanta, GA 30322, Kira_Fabrizio@bus.emory.edu; Rose: Professor of Economics, MIT Department of Economics, E52-280b, 50 Memorial Drive, Cambridge MA 02142-1347, nrose@mit.edu; Wolfram: Associate Professor of Business Administration, Haas School of Business, UC Berkeley, Berkeley, CA 94720-1900, wolfram@haas.berkeley.edu. Rose gratefully acknowledges support from the MIT Center for Energy and Environmental Policy Research (CEEPR), the Hoover Institution, the Guggenheim Foundation, and the National Bureau of Economic Research. We thank participants at NBER Productivity and Industrial Organization program meetings, the University of California Energy Institute POWER conference, and the MIT CEEPR conference, as well as seminar participants at Chicago, Harvard, MIT, UC Berkeley, UC Davis and Yale for their suggestions. Our work has benefited greatly from detailed comments by Mitali Das, Al Klevorick, Mark Roberts, Charles Rossman and Johannes Van Biesebroeck, and two anonymous referees. We thank Tom Wilkening for assistance in coding restructuring policies across states and Jen-Jen L`ao for assistance coding plant identities. 1Economists have long maintained that markets generate important efficiency benefits for an economy. These arguments usually focus on allocative efficiency; the implications of competition for technical efficiency are less clear. Neoclassical models of profit-maximization assume static cost-minimizing behavior by all firms, regardless of market competitiveness.1 Agency models, however, in recognizing the interplay of asymmetric information with the separation of management and control, suggest possible deviations from cost-minimization by effort-averse managers. These distortions may be amplified when a firm's prices are set by asymmetrically-informed regulators (e.g., JeanJacques Laffont and Jean Tirole, 1993). Replacing regulated price determination with markets makes firms residual claimants to cost-savings, potentially increasing incentives for efficiency-enhancing effort. 2 Theory suggests several possible roles for markets:c...

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confidence: 99%

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

Markiewicz

Rose

Wolfram

2007

American Economic Review

328

271

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“…9. Similarly, Primeaux (1977) found that municipally-owned electric utilities that face direct competition are more X-efficient than city-owned utilities that are monopolies.…”

Section: Discussionmentioning

confidence: 96%

Economic incentives under contract supply of local government services

Mehay

Gonzalez

1985

Public Choice

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The 'Lakewood Plan' of municipal service contracting is a system which allows California cities to purchase basic local government services from county government departments rather than produce the services in-house.1 Services commonly purchased on contract by cities include street rapair and lighting, traffic signals, libraries, building and safety inspections, engineering services, animal control, and solid waste disposal. In terms of revenue collected, however, general law enforcement and traffic law enforcement are the most important services provided by contract. 2 The few previous studies of intergovernmental contracting have focused solely on the impact of the system on the purchasing cities, for example, by comparing the expenditures of municipalities that purchase services from the county with the spending levels of cities that produce services in-house (Deacon, 1979;Mehay, 1979). To date, no analysis has been undertaken of the potential effects of contract supply on the county departments which supply the services.The goal of this paper is to analyze the differences in incentives to efficient production in a government department which supplies a portion of its services on contract versus a department which does not contract at all. In Section 1 the general theory of bureaucracy is employed to analyze the behavior of county agencies that supply services on contract. The basic hypothesis derived from the analysis is that the incentives for efficient production will be stronger for contract suppliers than for government bureaus that exchange their output for the usual lump sum budget appropriation. This hypothesis is examined empirically in Section 2, employing data from county sheriff departments in California. Section 3 presents the summary and conclusions.

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“…(2) Firms tend to dissipate some share of increased profits ex post through greater managerial inefficiency, called X-inefficiency; See Leibenstein (1966Leibenstein ( , 1978aLeibenstein ( , 1978b; Elhauge (2003), Button and Weyman-Jones (1992), Frantz (1992), Primeaux (1977), and Shelton (1967). (3) Increasing the profits reaped from market power will cause firms to spend more ex ante in competing to gain positions of market power, which will dissipate some or all of those profits ex ante; see Elhauge (2009), Posner (1975), and Fisher (1985.…”

Section: The Welfare Effects Of Metering Ties I Introductionmentioning

confidence: 99%

The Welfare Effects of Metering Ties

Elhauge¹,

Nalebuff

2015

SSRN Journal

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Critics of current tying doctrine argue that metering ties can increase consumer welfare and total welfare without increasing output and that they generally increase both welfare measures. Contrary to those claims, we prove that metering ties lower consumer welfare and total welfare unless they increase capital good output. We further provide conditions under which metering ties always harm consumer welfare for all uniform and lognormal distributions of consumable usage rates. Finally, we show that with a lognormal distribution, metering ties also lower total welfare absent a large dispersion in desired usage of the metered good. These findings support current tying doctrine, which presumptively condemns ties with market power absent proof of an offsetting procompetitive justification. JEL Codes: C72, K21, L12, L40, L41, L42.

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An Assessment of X-Efficiency Gained Through Competition

Cited by 99 publications

References 2 publications

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

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

Economic incentives under contract supply of local government services

The Welfare Effects of Metering Ties

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