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Title:The ratchet effect in a two lag setting and the mitigating influence of yardstick competition. PDF Logo
Authors:Brockmann, Cord
Issue Date:2007
Series/Report no.:Volkswirtschaftliche Diskussionsreihe / Institut für Volkswirtschaftslehre der Universität Augsburg 292
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.
Subjects:ratchet effect
yardstick competition
regulation
JEL:L51
Document Type:Working Paper
Appears in Collections:Volkswirtschaftliche Diskussionsreihe, Universität Augsburg

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