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

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 ap...

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Bibliographic Details
Published in:	The Journal of industrial economics Vol. 60; no. 2; pp. 220 - 248
Main Authors:	Borenstein, Severin, Busse, Meghan R., Kellogg, Ryan
Format:	Journal Article
Language:	English
Published:	Oxford Blackwell Publishing Ltd 01-06-2012 Blackwell Publishing
Subjects:	Average prices Benefits Customers Developing countries Economics Energy industry Industrial regulation Industry Labour economics Market economy Market efficiency Market equilibrium Market prices Market regulation Markets Natural gas Natural gas industry Natural gas utilities Perceptual localization Price regulation Professions Projects Public utilities Publishing industry Purchasing Regulated industries Regulation Studies Supply
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Summary:	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.
Bibliography:	istex:33850D6E53B28D881BFC3BE4F88D1DB4C839D432 We are grateful for helpful comments from Lucas Davis, Paul Gertler, Erin Mansur, Steve Tadelis, Matt White, Frank Wolak, three anonymous referees and the Editor, and from seminar participants at U.C. Berkeley, the U.C. Energy Institute, the University of Michigan, and NBER. Special thanks to Koof Kalkstein for sharing his extensive knowledge of the natural gas markets with us. We are grateful to the OpenLink Fund within U.C. Berkeley's Coleman Fung Risk Management Research Center and to the Energy Institute at the Haas School of Business for financial support. Energy Institute at the Haas School of Business ark:/67375/WNG-NQGNNT2M-G U.C. Berkeley's Coleman Fung Risk Management Research Center ArticleID:JOIE478 ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23 ObjectType-Article-1 ObjectType-Feature-2
ISSN:	0022-1821 1467-6451
DOI:	10.1111/j.1467-6451.2012.00478.x