Yardstick Competition Research Articles

The Measurement of Intra-Distributional Mobility: An Investigation of District Long-Term Housing Vacancies

It is not unusual for government reports to place spatial inequalities into a league table, highlighting poorly performing jurisdictions in some form of yardstick competition. A case in point is long-term dwelling vacancies. Action on Empty Homes, which works closely with local governments in the UK, provides commentary about poor performance, including recording persistently higher rates in certain regions and mentioning the worst rankings at the local level. How the distribution of vacant dwellings changes is not well explored. How rigid this league is has been a feature of a discussion in the growth literature. A useful dynamic policy measure in this regard is how far the average jurisdiction changes its league position over a given period. A type of convergence proposed here, implied by Sala-i-Martin, features the time for the initial rankings to become discordant with the current order. One could see this sort of measure being used widely, wherever performances are judged relatively as a means of highlighting good practice. Using English data on vacant dwellings, this paper shows that there is a ‘long memory’ in long-term vacancy rates, both at the local and regional levels. The industrial and housing inheritances of districts in the North of England, evident in the league table in 2004, remain influential after 18 years, even with general population growth. Although the use of incentives to bring dwellings back into use is thought to be successful, it is suggested that the role of the buy-to-let investor may have been overlooked. Changes in the treatment of their rewards appear to coincide with a rise in long-term vacancies.

Quality of institutions, rent-seeking, and inter-jurisdictional cooperation

AbstractThe differing fiscal needs of municipalities introduce bias into yardstick competition among local administrators driven by pure rent-seeking motives. The influence of institutional quality on this bias varies across cases, sometimes alleviating it, while in other instances exacerbating it. Inter-municipal cooperation provides incumbents with control over political yardstick competition. However, this alliance compromises the quality of public services when rent extraction is a priority. To address the issue of collusion and enhance accountability, the central government may find it counterproductive to uniformly improve institutional quality across all districts. Instead, a more effective approach may involve targeted policy interventions in specific districts, considering the varying levels of fiscal and institutional disparities. By doing so, the central government can disrupt the incentive for collusion and rent extraction among local incumbents.

Identifying Network Ties from Panel Data: Theory and an Application to Tax Competition

Abstract Social interactions determine many economic behaviors, but information on social ties does not exist in most publicly available and widely used datasets. We present results on the identification of social networks from observational panel data that contains no information on social ties between agents. In the context of a canonical social interactions model, we provide sufficient conditions under which the social interactions matrix, endogenous and exogenous social effect parameters are globally identified if networks are constant over time. We also provide an extension of the method for time-varying networks. We then describe how high-dimensional estimation techniques can be used to estimate the interactions model based on the Adaptive Elastic Net Generalized Method of Moments. We employ the method to study tax competition across US states. The identified social interactions matrix implies that tax competition differs markedly from the common assumption of competition between geographically neighboring states, providing further insights into the long-standing debate on the relative roles of factor mobility and yardstick competition in driving tax setting behavior across states. Most broadly, our identification and application show that the analysis of social interactions can be extended to economic realms where no network data exists.

Do intergovernmental interactions increase government spending?

ABSTRACT This study investigates yardstick competition in local government spending in South Korea. By leveraging the exogenous variation introduced by by-elections, the study estimates the influence of neighbouring jurisdictions on local expenditures. The findings reveal no significant interdependence in spending among South Korean municipalities, which contrasts with previous empirical studies from other countries. The results suggest that conventional spatial econometric methods may overestimate the degree of interdependence in local spending.

Reform, Not Revolution, is What is Needed Now for Yardstick Competition

Abstract Yardstick competition as a tool to set the prices of regional natural monopolies is now an established tool. After 30 years of application to the water industry in England and Wales, this article takes a critical look at how yardstick competition has been implemented in the latest Price Review 2019 (PR19). It proposes reforms to ensure that in the next Price Review 2024 (PR24) and/or beyond the efficiency challenges are appropriately set and the degree of information at the regulator’s disposal is maximised.

The impact of energy transition on distribution network costs and effectiveness of yardstick competition: an empirical analysis for the Netherlands

We assess the impact of regional differences related to energy transition on average costs and allowed revenues for a panel of Dutch electricity distribution system operators (DSOs) subject to yardstick competition. Yardstick competition entails that the allowed revenues of DSOs are based on the average costs of the entire industry, which requires that these DSOs are comparable. This comparability requirement is challenged by the penetration of distributed generation and other distributed energy resources, which may cause regional differences among DSOs. Estimating an average-cost function for the entire population of Dutch DSOs for the period 2012–2020, we find that the installed capacity of solar PV, installed capacity of on-shore wind and number of public electric-vehicle charging points have a significant effect on unit costs of DSOs. If yardstick competition does not take these effects into account, the allowed revenues for some DSOs (having above-average shares of energy-transition variables) are too low, whereas allowed revenues for other DSOs (having below-average shares of energy-transition variables) are too high. We find that taking the impact into account can change the price caps of individual DSOs with a percentage up to around 20%.

Reform, Not Revolution, is What is Needed Now for Yardstick Competition

Reform, Not Revolution, is What is Needed Now for Yardstick Competition

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.

Measurement and spatial-temporal convergence analysis of high-quality development of service industry: new city-level evidence in China

This research constructs an index system to measure the level of high-quality development of service industry in Chinese cities at the prefecture-level, and uses the entropy-weighted TOPSIS method to measure it. The spatial convergence model is also used to analyze the spatial and temporal convergence of service industries in urban agglomerations, and to analyze their regional differences and spatial and temporal convergence characteristics. It is found that there are regional differences in the level of service industry development in Chinese cities, showing conditional beta convergence characteristics. Further, the convergence of high-quality development of service industry is decomposed in the dimension of five intrinsic factors of high-quality industrial development. It is concluded that the spatial-temporal convergence presented by the high-quality development of service industry mainly comes from industrial restructuring, industrial synergy development and industrial environment optimization. The results show that the institutional factors of “active government” and “efficient market” significantly contribute to the improvement of the quality development of urban services, after add the institutional factors of fiscal decentralization and marketization. And the research based on spatial spillover effects find that the convergence of service development among cities is mainly based on the “Yardstick Competition” of convergence. These results contribute to a comprehensive understanding of the level of quality development of China’s urban service industry, also provide a reference for policy formulation for coordinated regional development and the construction of a unified national market.

Electricity sector reforms and cost efficiency: The case of small electricity systems in Sub-Sahara Africa

The financial viability of Sub-Sahara Africa (SSA) electricity sectors has become a central energy policy issue in recent years. This follows persistent under-recovery of costs which are amongst some of the highest in the world. Discussions, however, focus on tariff and utility reforms and inadequately on costs efficiency and the role of broader sector reforms in persistently high costs. Through a synthesis of reform theories and case studies and using small electricity systems as a surrogate for liberalized electricity sectors without competitive markets, this paper examines the connection between sector reforms and costs. It brings an economic perspective to the discussion on utility financial performance in SSA electricity systems and the need for a holistic policy approach for sustainable cost-recovery. In this, we recommend the promotion of mobile power plants to facilitate contestability in generation and need for non-island small systems to participate in regional power markets to neutralize the scale limitations of their autarkic demand. Utilities and regulatory agencies should form platforms to share information on cost opportunities and possibilities to inform procurement designs and regulatory benchmarks. Regional markets could partner with national governments to develop subsidy schemes such as Contracts for Differences to remove rigidities imposed by national power purchasing contracts to promote deeper participation of small systems in regional power markets. Yardstick competition in the distribution segment remains viable in many small electricity systems and should be pursued at the regional level in the short run to medium term and at the national levels in the long term following deconcentration and the introduction of private sector participation.

Peer effect in the construction of China’s high-speed rail stations: Empirical evidence from spatial econometric analysis

The construction of China’s extensive high-speed rail (HSR) network is driven by various motives of different participants. This study employs an improved spatial econometric model to examine the motivation of local officials behind the construction of HSR stations. We employ a comprehensive dataset consisting of information about HSR station construction, the promotion of officials, the economic growth rate, etc., in 246 prefecture-level cities in China. The findings suggest that local officials are not making their decisions regarding HSR stations solely on conditions in their own cities. The construction of HSR stations is largely affected by the peer effect arising from geographic adjacency, economic adjacency and administrative adjacency. This is mainly because China’s local officials are engaged in the Promotion Tournament based on Yardstick Competition. Political promotion strengthens the peer effect. In addition, the fact that no directional learning between developed and underdeveloped cities reveals the severity of the peer effect in the construction of HSR stations. This paper has also offered several policy implications based on empirical analysis.

Hospital Reimbursement in the Presence of Cherry Picking and Upcoding

Hospitals throughout the developed world are reimbursed based on diagnosis-related groups (DRGs). Under this scheme, patients are divided into clinically meaningful groups, and hospitals receive a fixed fee per patient episode tied to the patient DRG. The fee is based on the average cost of providing care to patients who belong to the same DRG across all hospitals. This scheme, sometimes referred to as “yardstick competition,” provides incentives for cost reduction, as no hospital wants to operate at a higher cost than average, and can be implemented using accounting data alone. Nevertheless, if costs within a DRG are heterogeneous, this scheme may give rise to cherry-picking incentives, where providers “drop” patients who are more expensive to treat than average. To address this problem, regulators have tried to reduce within-DRG cost heterogeneity by expanding the number of DRG classes. In this paper, we show that even if cost heterogeneity is eliminated, such expansion will fail to completely eliminate patient cherry picking. In equilibrium, the market will bifurcate into two groups, one of which will continue to cherry-pick patients and underinvest in cost reduction, whereas the other group treats all patients. Furthermore, we show that DRG expansion is particularly problematic if hospitals are also able to “upcode” patients, that is, intentionally assign patients to a more resource-intensive DRG than needed to increase income. Upcoding increases within-DRG cost heterogeneity and amplifies cherry-picking incentives. We examine potential solutions involving yardstick competition based on input statistics. This paper was accepted by Carri Chan, healthcare management. Supplemental Material: The online appendices are available at https://doi.org/10.1287/mnsc.2023.4752 .

Waste recycling and yardstick competition among Italian provinces after the EU Waste Framework Directive

ABSTRACT Recycling and the recovery of waste are crucial waste management strategies. In light of the new European Union (EU) circular economy approach, these strategies remain core pillars of a competitive and sustainable waste value chain. Local governments have an important role in controlling and checking the implementation of waste management policies. We study the spatial determinants of waste recovery using a dataset of 102 Italian provinces from 2001 to 2014. To induce a possible source of exogenous variation, we exploit the political cycle of the provinces to isolate the impact of waste recovery in neighbouring provinces on its own province’s waste recovery. We find that after the transposition of the 2008 EU Waste Framework Directive, provinces mimic their own neighbours in the separate collection of waste aimed at recycling and recovery. This effect is more pronounced during pre-electoral years than non-pre-electoral ones, and fully guided by provinces where the president can run for re-election.

Environmental governance, local government competition and industrial green transformation: Evidence from China's sustainable development practice

AbstractThe rapid development of China's economy has also led to serious environmental problems, which have seriously restricted China's sustainable development. To this end, the Chinese government has continued to explore environmental governance. So, can environmental governance policies promote industrial green transformation, so as to achieve the goal of sustainable development? Will environmental policy competition among local governments have an impact on them? These issues are the focus of this article. Based on the provincial panel data of China from 2006 to 2021, this article empirically analyzes the relationship between environmental governance, local government competition, and industrial green transformation. The results found that there was a “U” type nonlinear relationship between environmental governance and industrial green transformation. On the whole, most regions of China are still in the development stage where environmental governance is not conducive to industrial green transformation. There is competition for environmental governance policies among local governments in China, and the characteristics of “race to the bottom” are more significant. In the East developed areas, there is a more significant “yardstick competition” game state. In the Midwest undeveloped areas, it is manifested as competition for resources by deregulation of the environment, thereby promoting short‐term economic growth. In addition, local protection behaviors negatively regulate the impact of environmental governance on industrial green transformation, that is, inhibiting local industrial green transformation by causing labor market mismatch. This study can provide valuable insights for policymakers aiming to adopt measures to achieve the sustainable development of the economy and environment.

Local Policy Choice: Theory and Empirics

This paper critically surveys the growing literature on the policy choices of local governments. First, we identify various reasons for local government policy interactions, including fiscal competition, bidding for firms, yardstick competition, expenditure spillovers, and Tiebout sorting. We discuss theoretically what parameters should be estimated to determine the reason for competition among local governments. We emphasize how the policy outcomes emerging from this competition are affected by the presence of constraints imposed by higher-level governments. Second, we integrate theoretical and empirical analyses on the effects of fiscal decentralization on mobility, spillovers, fiscal externalities, economic outcomes, and distributional issues. Third, we identify key issues that arise in the empirical estimation of strategic interactions among local governments and highlight recent quasi-experimental evidence that has attempted to identify the mechanism at work. Finally, a synthesis model, containing multiple mechanisms and fiscal instruments, resolves some puzzles and provides guidance for future research. (JEL D72,H20, H71, H72, H73, H77, R51)

Reexamining the Environmental Kuznets Curve in Chinese Cities: Does Intergovernmental Competition Matter?

Since China's central authority began enforcing the environmental target responsibility system and introduced environmental indicators to the official ranking tournament in 2007, an ecological transformation has emerged in the intergovernmental competition (IGC) among localities. Because the extant literature on the environmental Kuznets curve (EKC) remains unclear regarding how that ecological IGC transformation changes the EKC economy-pollution correlation, this research investigates the degree to which the transformed IGC changes the form of the EKC, and how that altered EKC varies for different pollutants (i.e., SO2 and CO2) and in different regions (i.e., the eastern, central, and western regions). The results demonstrate a consistently inverted U-shaped relationship between income and SO2 emissions in all three regions, whereas when CO2 emissions are taken as the pollution indicator, the EKC hypothesis holds only in the eastern and central cities, and a positive linear income-CO2 nexus is found in the western region. Spatial analysis reveals that whereas the IGC flattens the inverted U-shaped curves between income and SO2 emissions, it has led to a higher economic cost, corresponding to the turning point of the EKC for CO2 emissions. The findings indicate that the ecological transformation of the IGC has facilitated a positive up-down yardstick competition in the strategic interactions of sustainable development across local Chinese governments, which can lead to a kind of balance between centralization and decentralization by inspiring local officials' adaptability and activity in reducing pollutant emissions and strengthening the officials' responsiveness to performance rankings. This study elucidates the environmental impacts of IGC in China and provides an institutional explanation for the strategic interactions among local governments when they are tackling the environment-economy nexus under multitask conditions.

A note on yardstick regulation of fishery monopolies

This note considers a two-period model of a fishery exploited by two firms selling their harvests in separate local markets. Assuming the harvesting cost is a private information to the firms, there is an agency that can regulate the market. I propose a contract in the realm of yardstick competition framework that allows the regulator to solve the information asymmetry problem and achieve cooperation.

Policy competition, imitation and coordination under uncertainty

The paper analyzes under what circumstances policymakers experiment with policies with uncertain outcomes, when they prefer to imitate policies initiated in other countries, and when they prefer to coordinate policies internationally. Policymakers have private costs of active policies and compete internationally in a yardstick competition which gives rise to a potential distortion between what citizens want and what policymakers do. I find that policymakers’ policies as well as regime choice deviate from what citizens want but that an increase in uncertainty about policy outcomes decreases this distortion.

Government intervention, spillover effect and urban innovation performance: Empirical evidence from national innovative city pilot policy in China

Recently, research on government intervention and innovation performance has emerged in large numbers. However, the endogenous problems arising from the indirect investigations make the results open to discussion. Against this background, this study uncovers the impacts of innovation intervention represented by the national innovative city pilot (NICP) on urban innovation performance and innovation convergence within the causal inference framework considering the policy spillover effect. Results reveal that NICP has a long-term positive effect on innovation performance in local and surrounding areas, while the spillover effect only exists in cities within the provinces and geographical neighboring cities in surrounding provinces, and conforms to the distance attenuation law. Moreover, the positive impacts of NICP on innovation performance in local and neighboring cities continue to be amplified as the quantiles of innovation performance increase. Not only that, NICP plays a positive role in accelerating innovation convergence across cities, resulting from the yardstick competition of fiscal expenditures on science and technology and the spatial knowledge spillover, and low-level innovation club has a stronger late-mover advantage in innovation convergence. These findings contribute to accurately evaluating the innovation benefits of expanding NICP networks and provide an important reference for innovation-driven development strategy.

Incumbents' Behavior and Strategic Interactions Among Local Governments: The Case of Indonesia

This paper investigates Yardstick Competition among local governments in decentralized Indonesia by distinguishing bad from good incumbent behavior. By doing so, this paper provides a more explicit connection between theoretical foundation and empirical investigation, where political incumbency is viewed based on the political economy perspective. Given that voters can compare and benchmark their incumbent's performance, an incumbent who aims for the throne twice must consider neighboring local governments' performance as the reference, leading to strategic interaction across local governments. We conduct empirical examinations using Two-regime Spatial Econometrics for panel data consisting of 99 local governments in the West, Central, and East Java Provinces from 2010 to 2017. Our empirical estimation results confirm that mimicking behavior by bad incumbents, characterized by the underperformed public sector, is evident. Bad incumbents mimic their neighbor's public spending. However, we find no evidence of Yardstick Competition by incumbents in general.