nep-reg New Economics Papers
on Regulation
Issue of 2013‒10‒02
eleven papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Asymmetric Incentives in Subsidies: Evidence from a Large-Scale Electricity Rebate Program By Koichiro Ito
  2. Specifying An Efficient Renewable Energy Feed-in Tariff By Farrell, Niall; Devine, Mel; Lee, William; Gleeson, James; Lyons, Seán
  3. Holding Distribution Utilities Liable for Outage Costs: An Economic Look By Brennan, Timothy J.
  4. A game theoretical analysis of the design options of the real-time electricity market By Haikel Khalfallah; Vincent Rious
  5. Prices versus Quantities: What is the discussion really about? By Lars Gårn Hansen; Frank Jensen
  6. Governance of CO2 markets: lessons from the EU ETS By Christian de Perthuis; Raphael Trotignon
  7. On the cost of misperceived travel time variability By Xiao, Yu; Fukuda, Daisuke
  8. Life cycle assessment of a road investment: estimating the effect on energy use when building a bypass road By Carlson , Annelie; Mellin , Anna
  9. Framework for Structuring Public Private Partnerships in Railways By Gangwar, Rachna; Raghuram, G.
  10. Information Provision in Procurement Auctions By Daniel García; Joaquím Coleff
  11. The Leverage Ratchet Effect By Anat R. Admati; Peter M. DeMarzo; Martin F. Hellwig; Paul Pfleiderer

  1. By: Koichiro Ito
    Abstract: Many countries use substantial public funds to subsidize reductions in negative externalities. However, such subsidies create asymmetric incentives because increases in externalities remain unpriced. This paper examines implications of such asymmetric subsidy incentives by using a regression discontinuity design in California's electricity rebate program that provided a financial reward for energy conservation. Using household-level panel data from administrative records, I find precisely-estimated zero causal effects in coastal areas. In contrast, the incentive produced a 5% consumption reduction in inland areas. Income and climate conditions significantly drive the heterogeneity. Asymmetric subsidy structures weaken incentives because consumers far from the rebate target show little response. The overall program cost is 17.5 cents per kWh reduction and $390 per ton of carbon dioxide reduction, which is unlikely to be cost-effective for a reasonable range of the social marginal cost of electricity.
    JEL: L11 L51 L94 L98 Q41 Q48 Q58
    Date: 2013–09
  2. By: Farrell, Niall; Devine, Mel; Lee, William; Gleeson, James; Lyons, Seán
    Abstract: This paper derives efficient pricing formulae for renewable energy Feed-in Tariff (FiT) designs that incorporate exposure to uncertain market prices by using option pricing theory. Such FiT designs are presented as a means to delineate market price risk amongst investors and policymakers when designing renewable energy support schemes. Sequential game theory provides the theoretical framework through which we model the strategic interaction of policymakers and investors during policy formulation. This model is solved using option pricing theory when a FiT is comprised of market prices combined with a guaranteed element. This solution also allows for an analytical formulation of the policy cost of subsidisation. Partial derivatives characterise sensitivity of policy cost and investor remuneration to deviations in market conditions beyond those expected. Analytical derivations provide a set of tools which may guide more efficient FiT policy and investment decisions. Numerical simulations demonstrate application for a stylised Irish case study, with a scenario analysis providing further insight into the relative sensitivity of policy cost and investor remuneration under different market conditions.
    Keywords: Renewable Energy, Feed-in Tariff, Option Pricing, Renewable Energy Support Schemes �
    JEL: G13 L94 Q4 Q48 Q5
    Date: 2013–09
  3. By: Brennan, Timothy J. (Resources for the Future)
    Abstract: Storm-related service outages in electricity and telecommunications have created public controversies regarding the adequacy of ex ante efforts to prevent outages and ex post efforts to restore power. Product liability rules, used to promote quality of service throughout the economy, might seem to offer a solution to this problem in the utility context. Strict liability rules avoid the need for determining whether utilities were appropriately careful but increase ratepayer costs because of moral hazard and, in effect, force ratepayers to buy outage insurance from the utility. By leaving customers exposed to damage, negligence rules can avoid these shortcomings but force upon regulators and courts the need to make difficult decisions regarding efficient care levels. Profit regulation, risk aversion, regulatory commitment failures, and distributional considerations add further complications. Still, the consideration of liability rules may provide worthwhile reminders that increased reliability is neither free nor guaranteed by public provision of service.
    Keywords: electricity, distribution, reliability, outage, blackouts, liability, negligence
    JEL: L51 K13 L94
    Date: 2013–07–05
  4. By: Haikel Khalfallah (PACTE - Politiques publiques, ACtion politique, TErritoires - Institut d'Études Politiques [IEP] - Grenoble - CNRS : UMR5194 - Université Pierre-Mendès-France - Grenoble II - Université Joseph Fourier - Grenoble I); Vincent Rious (Microeconomix - Microeconomix)
    Abstract: In this paper we study the economic consequences of two real-time electricity market designs (with or without penalties) taking into account the opportunistic behaviors of market players. We implement a two-stage dynamic model to consider the interaction between the forward market and the real-time market where market players compete in a Nash manner and rely on supply/demand function oligopoly competition. Dynamic programming is used to deal with the stochastic environment of the market and the mixed complementarity problem is employed to find a solution to the game. Numerical examples are presented to illustrate how the optimal competitor's strategies could change according to the adoption or no adoption of a balancing mechanism and to the level of the penalty imposed on imbalances, regarding a variety of producers' cost structures. The main finding of this study is that implementing balancing mechanisms would increase forward contracts while raising electricity prices. Moreover, possible use of market power would not be reduced when imbalances are penalized.
    Keywords: Electricity markets ; balancing mechanisms ; supply function equilibrium ; mixed complementarity problem
    Date: 2013
  5. By: Lars Gårn Hansen (Department of Food and Resource Economics, University of Copenhagen); Frank Jensen (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: Weitzman (2002) studies the regulation of a fishery characterised by constant marginal harvest costs and shows that price regulation performs better than quantity regulation when the regulator is uncertain about the biological reproduction function (ecological uncertainty). Here, we initially illustrate that this result does not generalise to a search fishery, where marginal costs are allowed to depend on harvest. Hansen et al (2008) study a fishery where non-compliance with regulations is a problem. When the regulator is uncertain about non-compliance (compliance uncertainty), then landing fees are the preferred type of regulation, and Hansen et al (2008) find that this result does generalise to a search fishery where marginal costs depend on harvest. In this paper, we simulate a stochastic stock-recruitment model for the Danish cod fishery in the Kategat capturing both ecological and compliance uncertainty. We find that the gain from eliminating compliance uncertainty may be up to 5% of gross profit while the gain from eliminating ecological uncertainty is minimal. Under landing fee regulation, the entire gain from eliminating both types of uncertainty is captured, even if the regulator’s stock measurement is uncertain. However, most of this gain can be captured within an ITQ system if the regulator is able to measure stocks accurately.
    Keywords: Compliance uncertainty, fishery regulation, illegal landings, instrument choice
    JEL: Q2
    Date: 2013–08
  6. By: Christian de Perthuis; Raphael Trotignon
    Abstract: The European emissions trading scheme (EU ETS) is the centrepiece of Europe’s climate policy. The system has been undermined variously by the weakness of its regulation, an undesirable overlap with other public policies and the far-reaching economic and financial crisis that caused the market price of allowances to plunge. This article attempts to identify the conditions for making the coming years of the EU ETS a success. It draws historical lessons from the eight years the scheme has been in operation, and then analyzes, using the ZEPHYR-Flex model, the various interventions by the public authorities currently under discussion in order to revive the market. These simulations reveal the risk of carrying forward problems to the future, with further clouding of the visibility needed by ETS actors in the long term. Finally, the article proposes to draw lessons from monetary policy by outlining what might be the mandate of an Independent Carbon Market Authority, with responsibility for the dynamic management of the supply of allowances, and whose main mission would be to ensure the optimal linkage between the different temporal horizons of the climate strategy.
    Keywords: Emission trading, EU ETS, governance
    Date: 2013
  7. By: Xiao, Yu; Fukuda, Daisuke
    Abstract: Recent studies show that traveler’s scheduling preferences compose a willingness-to-pay function directly corresponding to aggregate measurement of travel time variability under some assumptions. This property makes valuation on travel time variability transferable from context to context, which is ideal for extensive policy evaluation. However, if respondents do not exactly maximizing expected utility as assumed, such transferability might not hold because two types of potential errors: (i) scheduling preference elicited from stated preference experiment involving risk might be biased due to misspecification and (ii) ignoring the cost of misperceiving travel time distribution might result in undervaluation. To find out to what extent these errors matter, we reformulate a general scheduling model under rank-dependent utility theory, and derive reduced-form expected cost functions of choosing suboptimal departure time under two special cases. We estimate these two models and calculate the empirical cost due to misperceived travel time variability. We find that (i) travelers are mostly pessimistic and thus tend to choose departure time too earlier to bring optimal cost, (ii) scheduling preference elicited from stated choice method could be quite biased if probability weight- ing is not considered and (iii) the extra cost of misperceiving travel time distribution contributes trivial amount to the discrepancy between scheduling model and its reduced form.
    Keywords: travel time variability, scheduling delay, departure time choice, rank-dependent utility
    JEL: D61 D81 R41
    Date: 2013–09–22
  8. By: Carlson , Annelie (VTI); Mellin , Anna (VTI)
    Abstract: In the debate of climate change and mitigation of greenhouse gases, the issue of energy use is closely related. Several political aims concern the need to reduce the overall energy demand in the society, where transportation is an important contributor. In the transport sector, major efforts have been concentrated on developing more fuel efficient engines and vehicles. However, the road infrastructure, its operation and maintenance also use energy and do have an effect on traffic fuel consumption and emissions. It is therefore important to also take the infrastructure into consideration when addressing the energy issue for traffic and use a broader perspective. The objective of this study is to estimate the total energy use in a life cycle perspective of a road infrastructure investment and the impact of different phases of the roads life time. How the results are related to the transport objectives is also addressed. A life cycle assessment method is used to evaluate an infrastructure investment, including construction, operation, maintenance and traffic during 60 years. A small community is used as a case study where a bypass has been built and the result show that this investment will increase the total energy use by approximately 60%, or 1 550 TJ compared to not building it. A major part of the increase is due to traffic, and since mostly fossil fuel is used there will also be an increase in greenhouse gas emissions. The result stipulates that the aspects of energy efficiency and reduction of greenhouse gases has not been accounted for in the planning or it has been considered as less important than other aspects, e.g. traffic safety and accessibility.
    Keywords: Life cycle assessment; Energy use; Road infrastructure and traffic
    JEL: R40
    Date: 2013–09–26
  9. By: Gangwar, Rachna; Raghuram, G.
    Abstract: Structuring Public Private Partnerships (PPPs) in railways is a challenge, given its technology base, and obligation as a public and affordable mode of transportation. The sector provides strong incentives for vertical integration due to economies of scope. However, it is evident from the literature that large integrated PPPs in railways systems are not feasible due to higher commercial risks. They also suffer from implicit cross subsidization since the railway infrastructure is capital intensive, common to multiple revenue sources, and fare box revenues are generally not sufficient to recover investments. This is being addressed by various unbundling approaches in recent PPPs. This research explores the potential of unbundling the railway system into over 40 ‘elements’ wherein an element is the smallest unit that can be given to a party for execution. This would however result in significant horizontal and vertical interfaces between these elements. A sustainable PPP would need to limit the extent of interfaces due to transaction costs and risks. This can be achieved by bundling the elements horizontally and/or vertically into ‘entities’ to extract the best value for a PPP. The governing principles would be scale economies (horizontal integration), scope economies (vertical integration), need for competition (horizontal disaggregation), level playing field, transactional transparency, and need for specialization (vertical disaggregation). Additional drivers would be appetite for investment, availability of competence and accountability for an entity. The findings of the research indicate that the entity formation is one of the most crucial aspects of a PPP in railways. A consequential critical area is managing the interfaces between entities, which are subject to transaction costs and risks. These should be carefully identified and addressed by well-designed contractual agreements and independent regulation
  10. By: Daniel García; Joaquím Coleff
    Abstract: We analyze the optimal provision of information in a procurement auction with horizontally dierentiated goods. The buyer has private information about her preferred location on the product space and has access to a costless communication device. A seller who pays the entry cost may submit a bid comprising a location and a minimum price. We characterize the optimal information structure and show that the buyer prefers to attract only two bids. Further, additional sellers are inecient since they reduce total and consumer surplus, gross of entry costs. We show that the buyer will not nd it optimal to send public information to all sellers. On the other hand, she may prot from setting a minimum price and that a severe hold-up problem arises if she lacks commitment to set up the rules of the auction ex-ante.
    JEL: D44 D82 H57
    Date: 2013–09
  11. By: Anat R. Admati (Graduate School of Business, Stanford University); Peter M. DeMarzo (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods); Paul Pfleiderer (Graduate School of Business, Stanford University)
    Abstract: Shareholder-creditor conflicts can create leverage ratchet effects, resulting in inefficient capital structures. Once debt is in place, shareholders may inefficiently increase leverage but avoid reducing it no matter how beneficial leverage reduction might be to total firm value. We present conditions for an irrelevance result under which shareholders view asset sales, pure recapitalization and asset expansion with new equity as equally undesirable. We then analyze how seniority, asset heterogeneity, and asymmetric information affect shareholders’ choice of leverage-reduction method. Our results are particularly relevant to banking and highlight the benefit and importance of capital regulation to constrain inefficient excessive borrowing.
    Date: 2013–08

This nep-reg issue is ©2013 by Natalia Fabra. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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