Yardstick Competition Research Articles

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.

A cofinancing model for disability insurance and local government employers

AbstractEmployer cofinancing in disability insurance (DI) systems aims to reduce the inflow to DI by making employers internalise their DI costs. We evaluate a cofinancing system for the local government sector in Sweden inspired by the literature on yardstick competition. In the system, local governments are responsible for the DI of their employees, while being compensated by the central government for their expected DI payments. The arrangement essentially eliminates the large fiscal externalities associated with DI. Also, the arrangement can be implemented within current administrative setups, and the design credibly ensures that no extra costs are imposed on the local government sector in the aggregate. Drawing on Swedish employer‐employee matched data, we show that the net transfers implied by the scheme are quite large as a share of DI payments, but sufficiently small as a share of tax payments to not be onerous, and that they only marginally increase regional inequality.

Implicit yardstick competition between heating monopolies in urban areas: Theory and evidence from Sweden

This article examines a novel regulatory mechanism in a setting with multiple local monopolists. The mechanism rests upon the behavioral assumption that cus- tomers form opinions about prices by comparing them with prices set by nearby mo- nopolies and that this comparison influences their behavior. In this way, an “implicit yardstick competition” emerges among monopolists although they do not operate in the same markets. We test this mechanism using a unique dataset of unregulated district heating monopolists in Sweden. We find a large effect of neighbors’ prices, which indicates that the implicit yardstick competition has a considerable disciplin- ing effect on monopolies’ pricing behavior.

Strategic Interactions in Environmental Regulation: Evidence From Spatial Effects Across Chinese Cities

Developing countries are notorious for their enforcement gap in environmental regulation. Despite policymakers and scholars focusing on this phenomenon in China, there is little literature to explore the cause for its prevalence. This paper aims to explain this occurrence from the perspective of strategic interactions among the local governments in China based on the yardstick competition theory. Employing spatial panel data models, we use a panel dataset of Chinese cities to investigate strategic interactions in environmental regulation and identify their possible sources. The results depict a confirmative picture of strategic interactions in environmental regulation among Chinese cities, suggesting that the cities tend to imitate their neighbours and implement looser environmental regulation in response to the decreasing stringency in neighbouring cities. This transmission effect demonstrates the prevalence of incomplete implementation of environmental regulation. Moreover, the imitative actions vary across Chinese cities, as they are observed in eastern and western cities but not in central cities. In addition, the imitative actions are significantly weaker when environmental governance gains a higher degree of salience, indicating that green performance appraisals reduce strategic interactions among local governments. Finally, strategic interactions are found to originate from the fiscal decentralization system, and are strengthened by the turnover of the municipal party secretary or a younger one.

Public Debt Competition in Local China: Evidence and Mechanism of Spatial Interactions

AbstractWhile there is abundant theoretical or empirical research on fiscal competition in the form of tax or spending competition, little is known about public debt competition across local jurisdictions, which substantially contributes to growing public debt and, worse, a potential local government debt crisis in China. This study provides empirical evidence from China on spatial interactions of public debt across local governments. Using a provincial panel data set from 1999 to 2016, we found that provincial governments engage in strategic interactions via local public debt. These findings are robust across several model specifications. Further analysis found strong and direct evidence of the existence of yardstick competition among local governments on debt‐issuing behavior.

Cooperative identity as a yardstick for transformative change

Cooperatives serve a competitive yardstick role in markets dominated by market power such as monopsony or monopoly. This paper argues they can also serve a normative yardstick role in efforts to provide contextual social indicators for sustainability reporting that aims to instigate transformative change. The Statement on the Cooperative Identity, which includes cooperative values, principles, and purpose of associative economic organizing (ica.coop), can serve as a blueprint for the construction of social sustainability indicators. The paper then addresses two issues: one, it answers the question what should cooperatives measure and why; and two, it suggests the framework for transformative indicators informed by the purpose of cooperative organizing. In particular, cooperative enterprise model contributes to fair income distribution, promotes economic democracy, de-commodifies necessities and fictitious commodities, and contributes to community development by investing in the real economy. These impact areas ought to be measured and disclosed.

Multi-source strategic interaction in China’s public services: a spatial econometric analysis

ABSTRACT This study explores the form and sources of strategic interaction in China’s public services among local governments. The results indicate the existence of positive strategic interaction in provincial public services, with multiple sources of interaction, ranging from a direct mechanism, such as the spillover effect of yardstick competition among local governments, to an indirect mechanism, such as the resource flow effect under population mobility and market integration. Nevertheless, the obstacle of economic catch-up and hukou system reduces the interaction intensity. Furthermore, strategic interaction causes provincial public services to converge to a consistent level, indicating an equalization trend.

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.

Asymmetric yardstick competition: traditional procurement versus public-private partnerships

We consider local jurisdictions where rent-seeking administrators undertake identical infrastructure projects, choosing between two contractual arrangements: traditional procurement (TP) and public-private partnership (PPP). A yardstick competition mechanism is triggered through retrospective voters’ electoral decisions. A regime with TP in one jurisdiction and PPP in the other is likely to arise when projects are mildly lucrative and/or jurisdictions have moderate fiscal capacity. In this equilibrium, incumbents provide different levels of public services, face different re-election probabilities, and obtain different rents. By differentiating the project governance, incumbents specialize in rent extraction over time, thus hindering yardstick competition although jurisdictions are otherwise identical.

Spatial diversification of property tax policy – Searching for yardstick competition in Polish metropolitan areas

This article contributes to the ongoing debate on local tax policy-making, in particular regarding yardstick competition in the area-based property taxation system. Based on data from 300 municipalities located in ten metropolitan areas in Poland over ten years, we identify whether we are faced with tax mimicking induced by political considerations in tax rates setting. In particular, we seek to identify whether the spatial interdependence of property tax rates set by local governments of Polish municipalities is driven by a yardstick competition mechanism.The analytical approach is based on the estimation of the spatial residential property tax reaction function by using spatial autoregressive panel models. In order to verify the presence of yardstick competition, we include a set of purely political variables in the models and test their impact on tax rate decisions.The results confirm the evidence of yardstick competition, which, however, is present only in a few of the examined metropolitan areas. We found nominal tax rates for residential buildings that were significantly lower in election years, and empirical evidence of several political factors influencing local tax policies in Poland.

Conditional Yardstick Competition in Energy Regulation

Electricity production is a key sector in global decarbonization efforts, and variable renewable energy (VRE) technologies are a primary way to produce carbon-free electricity. We study an electricity market where generation is 100 %VRE, while storage and elastic demand resolve temporal supply-demand imbalances. We model hourly market equilibrium to analyze price formation and imperfect, Cournot-type competition with varying levels of ownership concentration.Market power is exerted either with storage-only or with both VRE and storage.In such a system, prices are determined dynamically by demand and intertemporal storage decisions, breaking the static logic of “merit order” with dispatch-able generation. The numerical results indicate that market power with storage has a relatively moderate effect on prices and market efficiency. However, market power exerted with VRE has far larger welfare impacts, resulting from curtailed generation. However, such actions could be more readily observed by a regulator via monitoring.

Stimuli contributing to local property taxation – with the focus on spatial effects of industry and functional urban areas

Abstract In this study, we argue that a historical background of the region matters in tax mimicking and yardstick competition as a matter of principle. We seek to determine factors supporting the policy of the high local property tax in the Czech Republic. Based on the statistical and spatial data of 6,258 municipalities between 2009 and 2019, the results show that the municipalities burdened by large industrial facilities, as well as municipalities in the functional urban areas (FUAs), apply the policy of higher property taxation twice frequently than the rest. On the other hand, the industrial stimuli keep enfeebling after 2010, and the number of local governments preferring high property taxation is variegated across different FUAs. The causal analysis based on Granger's approach concludes an existence of cumulative effects of both industry and the FUAs, which push the municipalities with large industrial facilities located within an FUA to increase the property taxes. From the mimicking point of view, we found that mimicking policy is an important phenomenon among the municipalities of Czech Republic; however, it has different impacts on both stimuli (Industry and FUA). The analysis suggests that it rather incites the municipalities within the FUA to increase the local property taxes.

Jurisdictional Competition, Market Power, and the Compensation of Public Employees

Jurisdictional competition can encourage government efficiency but may also lead to collective action problems (e.g., bidding wars) that increase taxpayer costs. The net effect is particularly consequential for the cost of public employee compensation, which accounts for more than half of local government spending. Examining two decades of U.S. teacher salary data and changes in local teacher labor markets over time, I show that jurisdictional competition is associated with lower teacher salaries. One mechanism consistent with the evidence is that competitive markets help encourage lower spending through yardstick competition.'' The findings may help explain why government consolidations designed to promote economies of scale and efforts to take advantage of coordinated buying power do not always produce the expected savings.

Political Budget Cycle, Tax Collection, and Yardstick Competition

Abstract This paper exploits the political cycle of Italian municipalities to test for the presence of strategic interactions in the collection of local taxation. The revenue from the personal income tax surcharge—a tax tool of low salience—is (positively) plagued by political manipulation and is found to be a strategic complement, but only when mayors run for re-election, a finding consistent with the yardstick competition hypothesis. More salient fiscal tools, such as property tax and user fees and charges, are also (negatively) affected by budget cycles, but they do not appear to be spatially correlated.

Cross-regional Radiation Effect of Environmental Protection Interview on Enterprises’ Green Innovation

The implementation of the environmental protection interview policy effectively drives the environmental governance behavior of the local governments interviewed. Whether the environmental protection interview policy can cross the administrative divisions and have an impact on the green innovation of enterprises in the neighboring areas of the government to be interviewed is worthy of further discussion. Based on the social interaction theory and the yardstick competition theory, this paper matches the environmental protection interview data of prefecture-level cities and the green patent data of manufacturing listed companies, and takes the promulgation and implementation of the Interim Measures for Interview of Ministry of Environmental Protection in 2014 as the starting point to observe the samples for 6 consecutive years, focusing on the cross-regional radiation effect of environmental protection interview policy on enterprises’ green innovation and the effect under the condition of different property rights system and regional environmental protection level. The results show that: Environmental protection interview has a significant cross-regional radiation effect on the green innovation of enterprises. Local government interviews at the municipal level can encourage enterprises in neighboring government areas to carry out green innovation. After further distinguishing the quality of green innovation, we find that this incentive effect mainly affects substantive green innovation, but has no significant impact on strategic green innovation. Moreover, the radiation effect is still significant after excluding the interference of provincial environmental protection policy. The regional environmental protection level has a significant impact on the cross-regional radiation effect. The lower the environmental protection level, the stronger the promotion effect of environmental protection interview on the green innovation of enterprises in the jurisdiction area. In addition, the radiation effect of environmental protection interview follows different property rights system logic: Compared with private enterprises, state-owned enterprises have more “policy response rigidity”, that is to say, environmental protection interview has a more significant cross-regional radiation effect on the green innovation of state-owned enterprises. From the perspective of green innovation, this paper reveals the cross-regional radiation effect of environmental protection interview policy, thus expanding the research boundary of environmental protection interview policy effect. At the same time, the research conclusion of this paper is helpful to deeply understand the key motivation of enterprise green innovation from the perspective of social interaction and yardstick competition, and can provide important enlightenment for the green development of Chinese enterprises.

Horizontal interactions in local personal income taxes

Theories of inter-jurisdictional tax and yardstick competition assume that the tax decisions of one jurisdiction will influence the tax decisions of other jurisdictions. This paper empirically addresses the issue of horizontal dependence in local personal income tax rates across jurisdictions. Based on a large data set covering Swedish municipalities over a period of 14 years, we test for interactions across municipalities that share a common border, across municipalities within a distance of 100 km of each other, and across municipalities with similar political representation in the local council. We also test the hypothesis that the tax rate of relatively larger municipalities has a greater influence on their neighbors' tax rate compared to the influence of their smaller neighbors. Our results suggest that when lagged tax rates are controlled for, the horizontal correlation across municipalities that share a common border or are within a distance of 100 km from each other becomes insignificant. This result is of importance as it suggests that lagged tax rates should be included or at least tested for when testing for horizontal interactions or mimicking in local tax rates. However, our results support the hypothesis of horizontal interactions across municipalities that share a common border when the influence of neighboring municipalities is also weighted by their relative population size, i.e. relatively larger neighbors tend to have a greater impact on their neighbor's tax rates than their relatively smaller neighbors. This is of importance as it suggests that distance or proximity matters, although only in combination with the relative population size. We also find some evidence of horizontal dependence across municipalities with similar political preferences.

Yardstick Competition and Spatial Interdependence of Cost Efficiency in Local Governments: Development and Application of an Interpretable Spatial Inefficiency Stochastic Frontier Model

Yardstick Competition and Spatial Interdependence of Cost Efficiency in Local Governments: Development and Application of an Interpretable Spatial Inefficiency Stochastic Frontier Model

Analysis of Medical Markets and Use of Mechanism Design Physician-Patient Interactions and Role of Organizations

This paper has been written after a seminar at the Soton business school (University of Southampton), discussing how market design mechanism can be useful for some medical markets, especially in combination with the reversed algorithm, called reversed conjoint model on physicians’ choices (Huttin, 2014, 2017); this first paper provides a description of two cases, one at the micro level of physician and patient interaction and a second one to integrate the organizational level of primary care groups. The first case is a micro representation of a physician-patient interaction, which can be expanded to integrate various types of heterogeneity of demand for care. The second case introduces the organizational level of primary care, with the example of the fundholding system; it leads to opt for a cooperative approach and to integrate variations between over spenders and lower spenders’ physicians. This paper uses the formalization of a game approach and proposes a stream of research for policy design in decision tools for financing reforms in health care. It explores how market failures in health care can be addressed with engineering economics and implementation of rules for different types of interactions in medical markets. Moreover, the limits to address the sources of heterogeneity between practices with tools such as yardstick competition may be addressed with the fast digitalization of the health system.

Political Cycles and Yardstick Competition in the Recycling of Waste. Evidence From Italian Provinces

Recycling and the recovery of waste are crucial waste management strategies. In light of the new 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 by using a dataset of 102 Italian provinces from the years 2001-2014. We exploit the political cycle of the provinces to isolate the effects of waste recovery in one province on neighboring provinces. We find that provinces mimic their own neighbors’ in the separate collection of waste aimed at recycling and recovery, with this effect being fully guided by provinces where the president can run for re-election (consistent with the yardstick competition hypothesis) but only when waste management policies become politically salient, that is, after the transposition of the 2008 EU Waste Framework Directive.

Government-decentralized power: Measurement and effects

Using tools from computational linguistics, we construct a new measure of government-decentralized power faced by Chinese firms: the diversity between central and local government work reports. Using our measure, we document that government-decentralized power has an inverse U-shaped impact on investment efficiency (a U-shaped impact on investment inefficiency). Currently, government-decentralized power is below its optimal level. The underlying mechanisms are yardstick competition among local governments and the election effect of political officials, which dominate the preference-matching effect in support of decentralization. Furthermore, local governments present broadly positive sentiment in their reports. This strengthens the negative impact of inadequate government-decentralized power.