Álvaro E. Bustos

Monopoly Regulation, Chilean Style: The Efficient-Firm Standard in Theory and Practice

This paper analyses the foundations of “efficient-firm” regulation (implemented in Chile for almost two decades), and the formulas that are used to set the prices of water/sanitation companies, electric power distributors and the dominant phone companies. We show that efficient-firm regulation implies setting prices equal to long-run average cost, which is optimal when the firm is required to be self-financing. In contrast, this is not true of the best-known alternatives, namely regulation based on rate-of-return or a price cap. We also show that in both efficient-firm and price-cap regulation, the fixed and exogenous period that is maintained between price-setting processes stimulates productive efficiency. We argue that the price-setting formulas and procedures used assume that the regulator has sufficiently precise information to determine the costs of a hypothetical efficient firm, without the need for information from the real firm. Nonetheless, modern regulatory theory and practice both show that prices cannot be set without drawing upon information that only the real firm possesses. The model developed in this paper is used to discuss the potential gains from replacing efficient-firm regulation by a price cap. We conclude that price-cap regulation also requires considerable amounts of information from the real firm; so, for the time being, Chile should focus on improving regulatory procedures, rather than changing the underlying mechanism.

The Effects of Audit Firms Rotation: An Event Study in Chile

In order to determine the market reaction to an announcement of a change in the audit firm, we carry on an event study between 2004 and 2013 that includes 130 publicly traded Chilean Companies. We find that the market reacted positively when a company announced that it will keep its audit firm that year. We rule out possible biases in the informational content of the event. This suggests that overall, the costs associated to a change of an audit firm (start-up cost and know how loss) would dominate the benefits of the same change (reduction in the probability of a value destroying event such as a fraud or an error). We discuss the implications of this result for the potential implementation of a rule of mandatory rotation in a developing country such as Chile. We also discuss the possibility of identifying the specific costs and benefits behind the audit firm change.

Judicial Choice Among Cases for Certiorari

How does the Supreme Court choose among cases to grant cert? In the context of a model that considers a strategic Supreme Court, a continuum of rule-following lower courts, a set of cases available for revision, and a distribution of future lower court cases, we show that the Court grants cert to the case that will most significantly shape future lower court case outcomes in the direction that the Court prefers. That is, the Court grants cert to the case with maximum salience. If the Court is rather liberal (conservative) then the most salient case is the one that moves the discretionary range of the legal standard as far left (right) as possible. But if the Court is moderate, then the most salient case will be a function of the skewedness of the distribution of ideologies of the lower courts and the likelihood that future cases will fall within the part of the discretionary range that is adjusted if the case is granted cert. Variations take place when the ideology of the Court is moderately liberal, moderately conservative or fully moderate. Extensions of the model allow us to identify the sensitivity of the results to the number of petitions for revision; the variety of legal topics covered by the petitions; and anticipation of whether the Court will confirm or reverse.

Communicating judicial retirement

Justices can strategically shape perceptions of their likely retirements, and so influence the President and Senate in choosing an ideologically compatible replacement. Relatively new justices can vote insincerely to affect how their ideologies are perceived, but their strategies are shaped by older justices’ expected retirement probabilities. We show that “strong messages” of retirement are likely when new justices vote insincerely and the new and retiring justices’ ideologies are aligned. “Weak messages” are more likely when new justices vote sincerely or, if they do vote insincerely, the old and new justices’ ideologies are unaligned.

Market Separation, Negative Consumption Externalities and Capacity Constraints

Companies that offer services with capacity constraints in which there are negative consumption externalities (such as restaurants that serve smokers and non-smokers, airlines that fyy passengers travelling with infants and without infants or organizers of sport events that serve aggressive and friendly supporters) tend to separate generators of the externality from receptors of the externality. Do consumers and/or Society end better off with this type of separation? We show that if firms have complete information then: unless the number of consumers is small enough, as a net effect, consumers end worse off with separation than without it. Instead, when investment in separation is negligible, firms always prefer separation. This is true regardless whether firms price discriminate consumers. On the other side, if firms have incomplete information then: consumers prefer no separation if their number is small enough and firms always prefer no-separation -also when investment in separation is negligible. First we derive the results in the context of a monopoly that serves a linear demand, later we address robustness and discuss policy implications.