Cost-efficiency and quality regulation of a public utility

Marten Ovaere

No 606626, Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: This paper studies the effect of linear cost-efficiency and quality regulation of a public utility on its cost-reducing effort and its provided quality level. The analysis shows that a quality incentive increases both quality and effort, while a cost-efficiency incentive increases effort and decreases quality. Next, introducing uncertainty and asymmetric information, I show that the power of the cost-efficiency and quality incentive should optimally be equal and below one. The incentive powers decrease with increasing uncertainty and increasing dislike for public utility profit. Last, we analyze case studies in electricity, gas and water. As in most cases the power of the quality incentive is higher than the power of the cost-efficiency incentive, the model predicts that supplied quality is too high.

Date: 2017-12
New Economics Papers: this item is included in nep-ene and nep-reg
Note: paper number DPS 17.21
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Published in Department of Economics. Discussion paper series,, pages 1-33

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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:606626

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