Cord Brockmann
The ratchet effect in a two lag setting and the mitigating
influence of yardstick competition
Abstract:
In order to increase efficiency in the provision of power distribution
networks, the German regulator Bundesnetzagentur plans to implement
revenue cap regulation together with yardstick competition. Revenue cap
regulation could bear the ratchet effect: cost minimization need not to
be optimal for the operator who anticipates that his revenue cap will
become adjusted according to his cost performance. The regulator could
extract all the rent by lowering an operator's revenue cap to the level
of costs he revealed to be possible for him to reach. The ratchet
effect could be mitigated by yardstick competition at which the level
of revenues that is allowed to one operator is tied to the performance
of others that are comparable to him. One will only be allowed to
accumulate revenues that recover the least cost level that has been
adopted within the group of comparable decision makers. In a setting of
two sequential regulatory lags, this paper examines the occurence of
the ratchet effect and the mitigating influence that yardstick
competition has on it.
JEL: L51
Paper:
Paper available as pdf-file.
Beitrag Nr. 292, Volkswirtschaftliche Diskussionsreihe, Institut
für
Volkswirtschaftslehre der Universität Augsburg
Contact:
Cord
Brockmann,
University
of Augsburg,
Department of
Economics,
Universitätsstr. 16,
D-86159 Augsburg, Germany, Phone +49-821-598-4196; Fax +49-821-598-4230
E-mail: cord.brockmann@wiwi.uni-augsburg.de
v.
K., 13.06.2007