Hold-up in regulated contracts: The Argentinean natural gas transmission system case

DE MEIO REGGIANI, M.C; VAZQUEZ M.; HALLACK M.; BRIGNOLE N.B.

New York

Congreso; SIOE 2017: 21st Annual Conference of the Society for Institutional & Organizational Economics- SIOE 2017; 2017

Society for Institutional & Organizational Economics

This article aims to understand the role of policy stability perception in the dynamic of network infrastructures regulation. We contribute to the literature by developing an abstract description of why the regulatory institutions in some countries have virtuous relation with network industries, while other countries enters in a vicious cycle. This abstract description allows us to consider general models that can explain different contexts. We test our description in a real case study. The asset specificities inherent to network industries mean high transaction costs, which in turn raises the hold-up risk. We depart from the idea the regulation (as tariffs structures) are a kind of contract between government and private companies. As explained by Williamson (1976) and Goldberg (1976), it is a special kind of arrangements in presence of incomplete contract that is able adapt and protect players from hold up. However, regulation can actual play a positive or a negative role in the network infrastructure development. This article combines two theoretical streams to build a theoretical model. We depart from the contract theory which Salant and Woroch (1992) models the incentives that governments have to behaviour opportunistically according the industries investment profile. We show that their analysis, which is based on the incentive compatibility principles, explains the behaviour differences if the investment profile of the industry is heterogeneous. However, it is not able to explain why industries with similar investment profile in different countries have completely different dynamic. This model cannot help to explain, for instance, why regulatory tools applied in Europe for network industries (as natural gas) turn out to generate completely different incentives if compared to Latin America. Stein and Tomasi (2007) underlined the importance of policy stability to understanding the Latin America success (or failure) in implementing policies. Regulation is a key element to implement policy, as explained by the authors. We include the variable policy stability perception as a key element in the understanding of the incentives to opportunistic behaviour in the interaction between both regulators and private companies. In order to test our model, we apply it to explain the case study of natural gas network in Argentina. The analysis of this case contributes to understand the role network industries regulation to deal with hold-up problem and how the institutional environment in which regulatory agencies are embedded matters.