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

Kira R. Fabrizio, Nancy L. Rose and Catherine D. Wolfram

American Economic Review Vol 97, No. 4, pp. 1250-1277 ( 2007)

Kira R. Fabrizio, Nancy L. Rose and Catherine D. Wolfram, American Economic Review Vol 97, No. 4, pp. 1250-1277 ( 2007)

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 marketoriented environments for many US 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.

 

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