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

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

Universidad de Columbia

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 in which the regulatory institutions in some countries have virtuous relation with network industries, while other countries enter 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 that regulation (as rate structures) is 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 the presence of incomplete contract that is able to adapt and protect players from holding up themselves. 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 conclusions of the contract theory proposed by Salant and Woroch (1992), who model the governments? incentives to behave opportunistically according to investors? investment profiles. We show that their analysis, which is based on the incentive compatibility principles, explains behaviour differences if the investment profile of the industry is heterogeneous. However, it is no able to explain why industries with similar investment profile in diverse countries have completely different dynamics. 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 et al. (2008) 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 significant element in the understanding of the government?s incentives to behave opportunistically.We check our model with the case study of natural gas network in Argentina. This analysis 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.