Christopher R. Knittel

ALTERNATIVE REGULATORY METHODS AND FIRM EFFICIENCY: STOCHASTIC FRONTIER EVIDENCE FROM THE U.S. ELECTRICITY INDUSTRY

The use of incentive regulation and other alternative regulatory programs in U.S. electricity markets has grown during the past two decades. Within a stochastic frontier framework, I investigate the effect of individual programs on the technical efficiency of a large set of coal and natural gas generation units. I find that those programs tied directly to generator performance and those that modify traditional fuel cost pass-through programs, to provide a greater incentive to reduce fuel costs, are associated with greater efficiency levels. Other programs have no statistical association with efficiency levels.

Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards

We test whether a nonbinding price ceiling may serve as a focal point for tacit collusion, using data from the credit card market during the 1980s. Our empirical model can distinguish instances when firms match a binding ceiling from instances when firms tacitly collude at a nonbinding ceiling. The results suggest that tacit collusion at nonbinding state-level ceilings was prevalent during the early 1980s, but that national integration of the market reduced the sustainability of tacit collusion by the end of the decade. The results highlight a perverse effect of price regulation.

Interstate Long Distance Rates: Search Costs, Switching Costs, and Market Power

A number of authors have argued that the divestiture of AT & T did not reduce the rates of long distance telephone companies as often believed. However, the literature has offered few explanations as to why competition has not lowered rates. This study argues that rates have failed to fall due to the importance of search and switching costs in the industry. Using a panel data set of rates for the three largest long distance carriers, stretching from 1984 to 1993, a reduced form equation is specified to empirically test for the influence of search and switching costs on the price cost margin of the three carriers. The results illustrate that both search and switching costs have provided long distance carriers with market power.

Some Inconvenient Truths About Climate Change Policy: The Distributional Impacts of Transportation Policies

Climate policy has favored costly measures that implicitly or explicitly subsidize lowcarbon fuels.We simulate four transportation sector policies: cap and trade (CAT), ethanol subsidies, a renewable fuel standard (RFS), and a lowcarbon fuel standard. Our simulations confirm that alternatives to CAT are 2.5 to 4 times more costly but are amenable to adoption due to right-skewed distributions of gains. We analyze voting on the Waxman-Markey (WM) CAT bill. Conditional on a district’s CAT gains, a district’s RFS gains are negatively correlated with the likelihood of voting for WM. Our analysis supports campaign contributions as a partial mechanism.

THE ADOPTION OF STATE ELECTRICITY REGULATION: THE ROLE OF INTEREST GROUPS*

This paper examines the adoption of state electricity regulation around the beginning of the 20th century. I model this decision as a hazard rate to determine what influenced the adoption of state regulation. I find that adoption is positively correlated with capacity shortages, greater wealth and lower residential electricity penetration rates. These results suggest that state regulation responded to regulatory inefficiencies and residential consumer interests. In addition, adoption rates were higher in states that had a strong industrial and coal mining presence. These results are consistent with the interest group and contracting theories of regulation.

The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program

The Cash for Clunker program aims to stimulate the economy, provide relief for automobile manufacturers and reduce greenhouse gas emissions. In this research note, I present estimates of the implied cost of carbon dioxide reductions under the Cash for Clunker program. The estimates suggest that the program is an expensive way to reduce greenhouse gases. This is true under a wide range of assumptions regarding the increase in fuel economy of new vehicles purchased under the program, how long the clunkers would have been on the road if not for the program, and whether we account for reductions in criteria pollutants. Conservative estimates of the implied carbon dioxide cost exceed

Absence of Value: An Analysis of Investment Allocation Decisions by Institutional Plan Sponsors

450 per ton; best case scenario parameter values suggest a cost of carbon dioxide of

Market Structure and the Pricing of Electricity and Natural Gas

200 per ton.

An economic perspective on the EPA's Clean Power Plan

To determine whether the investment decisions of institutional plan sponsors contribute to their asset values, this study used a dataset of 80,000 yearly observations of institutional investment product assets, accounts, and returns for 1984−2007. Results show that plan sponsors may not be acting in their stakeholders’ best interests when they make rebalancing or reallocation decisions. Investment products that receive contributions subsequently underperform products experiencing withdrawals over one, three, and five years. For investment decisions among equity, fixed-income, and balanced products, most of the underperformance can be attributed to product selection. Tests suggest that these results are not attributable to survivorship or other biases. Much like individual investors who switch mutual funds at the wrong time, institutional investors do not appear to create value from their investment decisions. Pension plans, endowments, and foundations are typically staffed with professionals who possess years of experience and advanced degrees. These institutional plan sponsors, either working on their own or with the aid of consultants, devote considerable time and resources to selecting asset classes and investment products that are expected to perform well for their beneficiaries or stakeholders. The assets in their care measure in the trillions of dollars, and this article presents a comprehensive examination of where and how their investment decisions contribute to, or detract from, asset value. We used the PSN investment manager database, which is compiled by Informa Investment Solutions from information reported by investment product managers. It contains historical data—annual summary information, quarterly and annual performance, assets and number of accounts under management—on thousands of investment products. The information in this database is used by managers for comparisons with their peers and by plan sponsors and pension consultants to identify investment manager candidates. Our analysis of asset and account flows and postflow performance covers 1984−2007 and includes these PSN categories: domestic equities (including growth, value, growth at a reasonable price, and core); international and global equities; domestic, global, and international fixed income; and domestic balanced. We conducted tests regarding added value by using both asset flows and account changes derived from data on annual assets and accounts under management for each product. Our results show that plan sponsors are not acting in their stakeholders’ best interests when they make rebalancing or reallocation decisions concerning plan assets. Portfolios of products to which they allocate money subsequently underperform products experiencing asset withdrawals or account losses over the one-, three-, and five-year periods following such reallocations. When postflow performance is decomposed into allocations between asset or style categories and product selection within the categories, product selection detracts more from performance than does asset allocation. We show that our results are robust to tests for the impact of survivorship bias, the presence of mutual fund assets, and autocorrelation in the data. Tests with account changes confirm the asset flow results. The economic significance of our findings is gauged by measuring the dollar impact of the return differences between portfolios of products that received inflows and portfolios of products that suffered asset withdrawals. This measure quantifies the value that was added or forgone by sponsors’ decisions regarding their plan assets. The value forgone is considerable, totaling

The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel Standard

56.2 billion over 22 one-year periods following investment decisions. To avoid double counting in estimating the total longer-term results, we used various weighting schemes to implement assumptions about sponsor reallocations of a portion of assets at the end of Years 1 and 3. The resulting five-year weighted average impact, without compounding, totals −