Efficiency and the hold-up problem in regulated industries

DE MEIO REGGIANI, M.C; VIEGO V; BRIGNOLE N.B.

Montreal

Conferencia; SIOE 2018: 22nd Annual Conference of the Society for Institutional & Organizational Economics; 2018

SIOE

The Argentinean natural gas transport companies had their rates frozen in 2002 and this contract disturbance lasted for almost 12 years despite high inflation rates. This problem, known as hold-up, affects a number of economic aspects such as firm behaviour (e.g. underinvestment) or operating performance (e.g. efficiency). In particular, this paper studies the relationship between the hold-up problem and operating efficiency in the regulated natural gas transport industry. We conducted a study that involved a two-step analysis of data collected from 2005 to 2016. First, a Cost Stochastic Frontier model was applied to a panel of 8 companies operating worldwide, two of which had been held up in 2001. Then, the technical efficiency estimates were regressed in a panel data model to establish the possible correlation between contract breach and operating restraints. The results suggest that those companies whose real rates were decreased due to held-up contracts could have been motivated to minimize their inefficiency. Although rate levels might not affect efficiency straightforwardly, a rise in price of those held up could ease operating restrictions. Therefore, inefficiency in held-up companies might increase under rate revisions.