Monday, September 3, 2007

Competition Improves Efficiency - Shocking!

In the most shocking news since Criss Angel made a pocketknife disappear, look for an article in the next American Economic Review entitled "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency." It's conclusions are so blunt it even caught US News and World Report's attention:

Over the past two decades, huge swaths of the economy have been deregulated, from banking to electricity to airlines. But has competition increased efficiency? In a paper forthcoming in the American Economic Review, a group of academics from Emory University's Goizueta School of Business, MIT, and the University of California's Haas School of Business say yes. In Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency, the researchers examine production at fossil-fuel generating plants from 1981 to 1999, before and after deregulation. Publicly owned plants, which were largely sheltered from deregulation, experienced the smallest efficiency gains. Investor-owned plants in states with restructured markets improved the most. Even in a stodgy old industry like electricity, markets do seem to work their magic.

The paper is currently available for free on the Berkley website. The abstract explains well:

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.

An excellent empirical work, nearly the entire article is as quotable as the abstract. The principle argument of free market advocates during electric reform was nearly dead-on.

During the second half of the 1990s, states began to shift their focus from
incentive regulation to restructuring. By 1998, every jurisdiction (50 states and the
District of Columbia) had initiated formal hearings to consider restructuring their
electricity sector, and by 2000, almost half had approved legislation introducing some
form of competition that included competitive retail access, whereby companies competed
to sell power to retail customers.10 Restructuring initiatives, in contrast to incentive
regulations, fundamentally changed the way plant owners earn revenue....Retail access programs in combination with the creation of the new
wholesale spot markets may increase the intensity of cost-cutting incentives, leading to
even greater effort to improve efficiency.

David Letterman: “Top Signs President Bush Needs A Vacation”: Staffers found him having a conversation with a coat rack; Asked CIA director to have Jason Bourne join hunt for Osama; Hasn’t stopped sobbing since he was passed over for “The Price is Right”; Has only seen the new Harry Potter movie four times; So overworked he’s pronouncing words correctly; He’s been drinking like an astronaut.

Jay Leno: Pretty busy day in Washington today. Attorney General Alberto Gonzales and Karl Rove went to U-Haul together to help each other move. ... Idaho Sen. Larry Craig, a married, conservative Republican, was arrested by a plainclothes police officer for lewd conduct in a Minneapolis airport men’s room. Today the senator’s office said it was all a big misunderstanding. The undercover police officer said the senator tried to reach under the stall to touch him, but the senator said, no, he wasn’t trying to touch him, he was only trying to pick up a piece of paper off the floor. Who picks up paper off the floor in the men’s room? I don’t even like when my shoe laces touch the floor in the men’s room. ... You know who I feel sorry for in this whole thing? The undercover cop. How’d you like to have that job? Sit in an airport bathroom all day, your pants around your ankles with a coffee and a donut waiting for guys to hit on you. ... At a political forum here in Hollywood last week, Hillary Clinton said that she does not support gay marriage. In fact, she said she’s not too crazy about straight marriage anymore, either. ... Fred Thompson said he’s still testing the waters in his bid for the presidency. He’s been testing the waters for what, like six months now? In fact, those aren’t wrinkles on his face—he’s starting to prune up from being in the water for so long.


Brian said...

Thanks for posting the Study, Will!

Man! Hillary is just.... Hillary-ous! lolol

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