Yardstick Competition Model Research Articles

Climate policy volatility hinders renewable energy consumption: Evidence from yardstick competition theory

Researchers have a high affirmative agreement on climate change and the need for policies to stimulate renewable energy consumption. However, there is little consensus among policymakers who are supposed to implement the solutions researchers propose. This phenomenon has led to extensive research on the effects of climate policy uncertainty (CPU) on energy consumption. We develop a yardstick competition model to examine the effect of climate policy volatility (CPV) on primary energy consumption in the U.S. residential sector. Our approach employs a Dirichlet process mixture linear model (DPM-LM) to account for unobserved heterogeneity and excess kurtosis. The results revealed that all three CPV estimators (Garman-Klass, Parkinson, and Rogers-Satchell) adversely affected the demand for hydrocarbon gas liquids (HGL) and biomass energy. In contrast, they positively affected the consumption of natural gas. The control variables (price and GDP) were consistent with the a priori expectations. This paper concludes that CPV creates a disincentive to increasing renewable energy demand. It is, therefore, critical for policymakers to consider ways of stabilizing climate policy and arriving at specific, measurable, achievable, realistic and definite time-bound goals and policies. It is equally important for policymakers to use science-based ex-post measures to inform the climate policy debate.

On the dynamic optimality of yardstick regulation

This paper proposes a generalization of Shleifer’s (RAND J Econ 16:319–327, 1985) model of yardstick competition to a dynamic framework. In a differential game setting, we show that the yardstick mechanism effectively replicates the first-best solution if players adopt open-loop behaviour rules and are symmetric at the initial time; in the absence of initial symmetry, the social efficiency is reached only in the asymptotic steady state. On the contrary, if players adopt Markovian behaviour rules, then the yardstick pricing rule cannot achieve the first-best solution along the equilibrium path of any Markov Perfect Nash Equilibrium.

Target‐setting, political incentives, and the tricky trade‐off between economic development and environmental protection

AbstractDisentangling the relationship between economic development and environmental protection has attracted much attention from public administration scholars. While traditionally scholars approach the relationship from either a substitutive or a complementary perspective, we offer a nuanced perspective by examining how the target‐setting on economic growth shapes environmental performance. This article proposes an explanation for the impacts of gross domestic product growth targets on environmental performance based on a yardstick competition model, where the upper‐level governments use relative performance to create competition among lower‐level governments. We argue that a trade‐off exists between economic development and environmental performance; however, the substitutive relationship tends to transit to a complementary relationship when environmental performance is incorporated into the cadre evaluation system. Analyzing a panel dataset of economic targets and PM2.5 air pollution across Chinese cities from 2001 to 2010, we confirm the relationship between economic targets and environmental performance by highlighting local leaders' political incentives.

Resource flow or yardstick competition: spatial dependence of educational expenditure among prefecture-level cities

Primary and secondary education, provided by the local governments in China, plays an important role in attracting talented migrants. The race for talent and the education assessment from the top encourage local governments to compete with its neighboring localities in public education spending. Two theoretical frameworks can be applied to explain such strategic interactions among local governments—the resources-flow model and yardstick competition model. Using panel data of China’s prefecture-level cities from 2007 to 2016, this article conducts a spatial econometric analysis to test the two aforementioned models empirically. The estimation results show that aside from a significant positive spatial dependence of education expenditures among local government in the same province, it also occurs among prefecture-level cities in different provinces. Indeed, based on the data that demonstrated the comparison among cities in different provinces with similar economic distance is stronger than that with closer geographical distances.

Fiscal disparity, institutions and asymmetric yardstick competition

This letter introduces a disparity in the costs of rent appropriation in a yardstick competition model and shows that the yardstick bias caused by fiscal disparity might be mitigated. In particular, the incumbent of the fiscally rich jurisdiction can no longer fully exploit his or her fiscal advantage.

An incentive approach based on data envelopment analysis for intra-organization yardstick competition

Recently, Varmaz, Varwig, and Poddig (2013) developed a DEA-based Yardstick competition model for intra-organizational incentive mechanisms. Afsharian, Ahn, and Thanassoulis (2017) identified two shortcomings and developed an approach to remedy these shortcomings. However, Afsharian et al.’s (2017) approach cannot comprehensively capture the contribution of each DMU to the overall efficiency of the system. To overcome these shortcomings, we propose a new approach to measure individual's contribution to the system’s overall performance. The applicability of our proposed approach was validated with an empirical study of a German retail bank. This study’s results are compared with those from Varmaz et al.’s (2013) study and Afsharian et al.’s (2017) study. The results indicate that our proposed approach scores over Varmaz et al.’s (2013) approach and Afsharian et al.’s (2017) approach in not only correctly estimating each unit’s contribution to the overall performance but also properly revealing the sources of the contribution.

Competition among Local Governments: Healthcare Expenditure under Fiscal Decentralization

Medical and health services concerns the well-being of people. It is fundamental for promoting the construction of China’s people-centered health strategy and realizing the development for the benefit of all. This study proposes a theoretical model of yardstick competition from the top” and discusses the existence of inter-city tactful interaction behaviors in healthcare spending among prefectural-level municipal governments within the framework of a decentralized system. Very often, healthcare spending decisions made by prefectural-level municipal governments are influenced by the relevant strategies of the neighboring cities. Based on the data from 283 prefectural-level cities in China from 2007–2013, and using the dynamic spatial Durbin model (SDM), empirical tests are performed at the prefectural level to investigate the effects of interactions between cities within the same province, as well as the impacts of fiscal decentralization and its spatial tactful interactions in healthcare spending. We conclude that significant strategic interactions exist among municipal governments in government healthcare spending. Furthermore, the strategic interaction of government healthcare spending belongs to complementarities. This indicates that if the adjacent municipal government raises the level of healthcare spending in the same province, the city government's optimal strategy will be to increase the level of government health spending accordingly, with cities characterized by geographical proximity and competing more strongly for government healthcare spending. Moreover, fiscal decentralization seems to drive the supply of government health services, as tactful interactions tend to limit government health spending. This explains why the share of government health spending has been hovering at around 2%. Overall, the implementation of competitive or incentive mechanisms and optimized financial arrangements emerge as a truly effective policy to stimulate the supply of government health services. The potential contributions of this paper are as follows. Firstly, in theoretical research, considering welfare maximization decision-making under the restriction of limited resources, this paper develops a top-down” competition model for government healthcare spending between municipal governments using the interaction theory framework. Secondly, the dynamic spatial Durbin model (SDM) is used to solve the path dependence” characteristics of government healthcare spending and to ease the problem of endogeneity. The research conclusion is more accurate after a comprehensive consideration of government healthcare spending over time, space, and time-space lag effects. Thirdly, based on a panel data of 283 prefectural-level cities from 2007–2013, this paper projects a micro and accurate description of the competing behaviors of prefectural-level city governments. Finally, from a research perspective, this paper contributes practical value by examining the strategic interactions in government healthcare spending behaviors, and shows the short- and long-term effects of fiscal decentralization and the strategic competition for space in government healthcare spending.

Public Education, Accountability, and Yardstick Competition in a Federal System

Abstract Against the backdrop of a growing national and international accountability movement in education outcomes, this study sets up a simple model of yardstick competition with incumbent-disciplining effects through voters comparing performance measures of public education both across nations and federal states. It implies a potential strategic dilemma where a single top-performance state can block reform measures that could benefit low-performance states more than would do for itself. The linchpin predictions of the model are tested by analyzing announcement effects of student achievement tests on vote and popularity (VP) functions of German national and state government incumbents.

The Effects of Political Institutions in China: Evidence from the Mandatory Retirement Age at the Provincial Level

This study takes advantage of a “natural experiment” to show how changes in political institutions shape politicians’ incentives, and in turn affect important policy outcomes in China. Beijing introduced the mandatory retirement age for provincial leaders in the 1980s, but it did not fully institutionalize the new rule across all provinces until 2000. I therefore use this window to construct a difference-in-differences research design. Based on data from 1978 to 2005, I find that the enforcement of mandatory retirement rule does lead to better development outcomes. Provincial leaders who are eligible for promotion are now motivated to perform better on growth and social welfare provision in order to succeed under the performance-based promotion system. But the evidence also suggests that the mandatory retirement rule results in poorer performances among lame-duck leaders who have no chance for further promotion but to retire soon due to the age restriction. I also find that, contrary to what we expect, provincial leaders with central connection tend to have worse performances on growth. This finding shows that when politicians have connection with the center, they hold the key to promotion already. As a result, they do not need to worry about competing with others under the Chinese model of yardstick competition.

Yardstick competition in a federation: Theory and evidence from China

In this paper, we test empirically for competition among Chinese provinces embedded in a centralized political system. To motivate the empirical work, we adapt Besley and Case's model (American Economic Review, 1995) to a model of yardstick competition ‘from the top’. In this model, the central government (rather than local voters) creates competition among local officials by rewarding or punishing them on the basis of relative performance in providing public services. Our theoretical framework predicts that, in this context, the central government spurs strategic interactions among governors with similar environments as voters do in democratic countries. Then, for the first time in our knowledge, by estimating a spatial lag dynamic model for a panel data of 29 Chinese provinces from 1980 to 2004, we provide empirical evidence of the existence of such public spending interactions. We propose a rigorous empirical framework which takes into account heterogeneity, endogeneity problems and spatial error dependence. The results tend to confirm the existence of strategic interactions among geographically and economically close Chinese provinces, operating in a vertical bureaucratic control system.

Corruption, decentralization and yardstick competition

Several empirical studies have found a negative relationship between corruption and the decentralization of the powers to tax and spend. In this paper we explain this phenomenon using a model of Yardstick Competition. Using data on federal corruption-related convictions in U.S. states, we also provide new evidence that points to the existence of a spatial autoregressive component to explaining corruption. We interpret this as consistent with the theoretical findings.

A yardstick competition model for Portuguese water and sewerage services regulation

Water and sewerage services present relevant market failures, demanding a State visible hand for their correction. Their intensity degree may require the use of incentive regulation. Furthermore, since the water and sewerage services remain, almost always, the responsibility of the municipalities, the high number of players involved support the adoption of yardstick competition. This paper provides an overview of this regulatory methodology and discusses its appropriateness to the water sector in Portugal. It examines two approaches of yardstick competition and concludes that, in the short-term, only the comparison and public debate of performance results would be effective and credible.

The Role of the Policy Framework for the Effectiveness of Benchmarking in Regulatory Proceedings

Regulation is an information problem. In this paper we show that benchmarking can have an important role to play in extracting information and providing efficiency incentives. However, the effectiveness of this role depends both on the credibility of the regulator to undertake a comparative efficiency analysis, and the impact of the benchmarking on the value of the firm. These are both affected by the policy framework within which the regulator operates. In Britain the regulator is not obliged to undertake any benchmarking, and the impact of the benchmarking that has been undertaken has been relatively low. These conditions have the effect of diminishing incentives for both information provision by the companies and model developments by the regulator. In the Netherlands, the impact on business value is high because benchmarking sets the price differentials from which a yardstick competition model – required by law – is implemented. These twin conditions of high credibility and high impact on value both sharpen incentives for the businesses to reveal information at the time of the benchmarking and also provide a stimulus for the regulator to properly account for firm-specific effects. In Austria, where similar conditions to the Netherlands have been established, we described the regulator's attempts to improve the robustness of the cost drivers in the model.

Corruption, Decentralization and Yardstick Competition

Several empirical studies have found a negative relationship between corruption and the decentralization of the powers to tax and spend. In this paper we explain this phenomenon using a model of Yardstick Competition. Using data on federal corruption-related convictions in U.S. states we propose and test a spatial autoregressive model of corruption, providing new evidence in support of the theoretical findings.

How to Regulate Heterogeneous Hospitals?

In many areas of health care financing, there is controversy over the sources of cost variability and about the respective roles of inefficiency versus legitimate heterogeneity. This paper proposes a payment system that creates incentives to increase hospital efficiency when hospitals are heterogeneous, without reducing the quality of care. We consider an extension of Shleifer's yardstick competition model and apply an econometric approach to identify and evaluate observable and unobservable sources of cost heterogeneity. Moral hazard can be seen as the result of two components: long‐term moral hazard (hospital management can be permanently inefficient) and transitory moral hazard. The latter is linked to the manager's transitory cost‐reducing effort. For instance, he or she can be more or less rigorous each year when bargaining prices for supplies delivered to the hospital by outside firms. The use of a three‐dimensional nested database makes it possible to identify transitory moral hazard and to estimate its effect on hospital cost variability. Econometric estimates are performed on a sample of 7,314 stays for acute myocardial infarction observed in 36 French public hospitals over the period 1994–1997. We obtain two alternative payment systems. The first takes all unobservable hospital heterogeneity into account, provided that it is time invariant, whereas the second ignores unobservable heterogeneity. Simulations show that substantial budget savings—at least 20%—can be expected from the implementation of such payment rules. The first method of payment has the great advantage of reimbursing high‐quality care. It leads to substantial potential savings because it provides incentives to reduce costs linked to transitory moral hazard, whose influence on cost variability is far from negligible. This payment rule could be extended to other areas of health care financing, such as Adjusted Average Per Capita Cost to calculate Medicare Managed Care reimbursements in the United States.

Yardstick Competition and Policy Innovation

A simple model of yardstick competition between jurisdictions is presented. Governments of jurisdictions face the alternative to choose between an old and a new policy with stochastic payoffs. The new policy is superior to the old policy in one state of the world, and inferior in the other. Governments are either benevolent, serving the interest of the voter, or rent-seeking. An equilibrium with yardstick competition is shown to exist where bad governments having a good government in their neighborhood choose the new policy more often compared to an equilibrium without relative performance evaluation. Overall, the probability of policy innovations is increased by yardstick competition. The model has a testable empirical implication saying that policy innovations should show spatial correlation.

Le mimétisme fiscal : une application aux Régions françaises

Le mimétisme fiscal a récemment fait l’objet d’une attention particulière dans l’analyse des interactions fiscales entre collectivités territoriales. Le mécanisme de ces interactions peut procéder de la possibilité qu’ont les électeurs de comparer la politique fiscale de leur gouvernement à celle menée dans les collectivités voisines et d’évaluer ainsi l’efficacité relative de leurs élus. Ce contrôle potentiel peut inciter ces derniers à s’imiter. Une telle attitude, contrairement à la compétition fiscale « en base », peut conduire à une convergence des taux d’impôt à un niveau plus élevé que le niveau efficace. Dans cet article, un modèle simple de type « concurrence par comparaison » est proposé et testé empiriquement sur les régions françaises.

Local taxes, national politics and spatial interactions in English district election results

This paper develops a political agency model of yardstick competition, where voters appraise the incumbent government's quality by looking at their jurisdiction's taxes relative to their neighbours. The model is tested on a panel data set of the English local governments in the 1980s. Generalised Method of Moments (GMM) estimation results show that own tax increases have a negative impact and neighbours' tax increases have a positive impact on incumbent popularity. However, after controlling for the influence of national politics, the estimated electoral consequences of local tax increases turn out to be less significant.

Le mimétisme fiscal : une application aux Régions françaises

Tax Mimicking : an Application to the French Regions. Yardstick competition has recently gained attention in the analysis of tax interactions among regional or local governments. Voters compare the tax policy of their government to those of neighbouring jurisdictions in order to evaluate the tax efficiency of their representatives. This may induce the latter to adopt the policy of other jurisdictions. The difference with tax competition is that ‘mimicking’may also lead to a convergence of tax rates at a level higher than the competitive one. In this paper, such a model of yardstick competition is developed and empirically tested using data for tax-setting behaviour of the French regions since the decentralisation process.

Is there a ‘California effect’ in US environmental policymaking?

What determines state environmental policymaking in the US? Vogel (Trading Up: Consumer and Environmental Regulation in a Global Economy, Harvard University Press, Cambridge, MA, 1995; J. Eur. Pub. Pol. 4 (1997) 556–571) argues that California has been a de facto leader since the early 1970s in terms of automobile emissions standards. In this paper, we investigate the generality of California’s leadership role with respect to changes in overall pollution abatement expenditures. We present a simple model of yardstick competition in abatement costs. Using state-level panel data from 1977 to 1994 on abatement costs, our results indicate at best a minor role for California. Other states, in particular California’s immediate neighbors, do not appear to use California as a guideline.