We propose a difference-in-differences approach to estimating the impact of incentives on cost reduction in the context of German electricity networks. When subject to a lower-powered regulation mechanism, relatively more efficient operators pile up more costs in the year used to determine future prices. This pattern is consistent with the idea that incentives matter: higher-powered incentives lead to cost reduction. The results are also consistent with an equilibrium where more efficient firms pool with less efficient ones under the threat of ratcheting.
Hellwig, Michael, Dominik Schober and Luís Cabral (forthcoming), Low-Powered vs High-Powered Incentives: Evidence From German Electricity Networks, International Journal of Industrial Organization. Download