Wednesday, 20 June 2012

Career Concerns, Inaction and Market Inefficiency: Evidence From Utility Regulation

an article by Severin Borenstein (University of California, Berkeley and National Bureau of Economic Research) Meghan R. Busse (Northwestern University, Evanston, Illinois and National Bureau of Economic Research) and Ryan Kellogg (University of Michigan, Ann Arbor and National Bureau of Economic Research) published in The Journal of Industrial Economics Volume 60 Issue 2 (June 2012)


We study how incentive conflicts known as ‘career concerns’ can generate inefficiencies not only within firms but also in market outcomes. Career concerns may lead agents to avoid actions that, while value-increasing in expectation, could potentially be associated with a bad outcome.

We apply this theory to natural gas procurement by regulated public utilities and show that career concerns may lead to a reduction in surplus-increasing market transactions during periods when the benefits of trade are likely to be greatest.

We show that data from natural gas markets are consistent with this prediction and difficult to explain using alternative theories.

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