1 Performance Measurement, Regulation and UK Productivity A Multidisciplinary Overview of Unintended and Indirect Effects Ideas factory Presentation, 10 July 2006 Gerben Bakker, Stavroula Iliopoulou, Joseph Antony, Vlado Balaz, Anjula Gurtoo, Rosalind Rae, Kim Tan, Kathryn Walsh, and Alan Williams Essex-Leeds-Nottingham-Loughborough-Exeter
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Performance Measurement, Regulation and UK Productivity
A Multidisciplinary Overview of
Unintended and Indirect Effects
Ideas factory Presentation, 10 July 2006
Gerben Bakker, Stavroula Iliopoulou, Joseph Antony, Vlado Balaz, Anjula Gurtoo, Rosalind Rae, Kim Tan,
Kathryn Walsh, and Alan Williams
Essex-Leeds-Nottingham-Loughborough-Exeter
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Structure
1. Focus
2. Key characteristics
3. Background
4. Theoretical perspectives
5. Potential outputs
6. The future
7. Conclusion
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Focus:
• Regulation and performance measurement– Indirect, unforeseen and unintended effects– On UK productivity– Comparison with other countries
• Overview of literature• Overview of existing seminal cases• Detailed examination of a few cases in detail
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Key characteristics:
• Multidisciplinary
• Emphasis on the practical
• Specific cases as focal points
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Why is this research worthwhile?
• Regulation and performance measurement critical for understanding productivity performance
• At present literature is compartmentalised by discipline
• Collaborative, blue skies research– In the spirit of the Ideas Factory
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Background:
• Low-budget £50,000 multidisciplinary scoping study
• 5 investigators, each in a different discipline (pro bono)
• 5 Research Officers
• Experimental character (content as well as process)
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Structure of project:
• Two wide literature and conceptual studies– Economic and business literature on indirect effects of
regulation– Literature on indirect effects of performance
measurement (and potential relation to regulation)
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Structure of project:
• Three case-studies, each across a different empirical dimension– A specific type of regulation (environmental)– A specific industry (engineering)– A specific regulatory event (air line deregulation)
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Theories on regulation
• Normative analysis as a positive theory (NAPT)• Capture theory (CT)• The economic theory of regulation (ET)
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Normative analysis as a positive theory
• Market failure– Natural monopoly– Externalities
• Problems– Assumes market failure rather than test it– No evidence, or contrary evidence– Limited effect of regulation on monopoly pricing
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Capture theory (CT)
• Industry captures the regulatory process so that regulation favours the existing industry
• Problems:– Assumes capture rather than test it– Contrary evidence
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The economic theory of regulation (ET)
• Regulation as the outcome of competition between interest groups that all want to maximise their income
• Two major models/approaches:– Stigler/Peltzman model: regulator maximises political
support– Becker model: the relative effects of competing
interest groups
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The economic theory of regulation (ET)
• Benefits small groups with strong preferences• Regulatory outcomes are generally not profit-maximising
because of the constraining effects of consumer groups• Regulation most likely in:
• Average costs per firm higher– Entry prohibition limits welfare loss– Reduction no. of firms may reduce it further
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Direct effects: the competitive model
• Second-best effects:– Theory of second-best
• Spread of regulation does not reduce welfare necessarily
• Unregulated firms can undercut regulated ones– E.g. trucks vs. railroads
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Direct effects: imperfectly competitive model
• Firms restrict supply to keep price > marginal costs• Regulation to reduce price may increase welfare• Free entry can lead to too much firms (inefficiency)
– Effects of entry/exit regulation unclear• Practical problem:
– Difficult to know right costs and prices (information; asymmetry)
The net impact of direct regulation often differs considerably from what the regulators say that they are doing (due to Indirect & Unintended effects, which may have more economic significance than the desired direct ones)
Christainsen & Haveman (1981)
Manufacturing Sector (US)
Adoption of New pollution control equipment
Manpower required to handle new equipment, employment levels rise but NOT marketable output
Complying with reg requires info gathering, admin, legal activities that require inputs yielding no saleable output
Meeting the requirements needs time, causing delay in expansion & modernisation plans, and stretching-out of construction periods
OECD (2000)
Theoretical arguments
Proposed reforms in UK
1. Competition: Increased benefits may come at a cost
1. Risk of inconsistent application of law across industries
1. Masking of growing income inequality
2. Firms may face higher non-wage costs
1. Overinvestment
OR disincentives to grow
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Potential outputs:
• Each investigator/RA team is working on a working paper/journal article on their component
5 original papers covering the different aspects/disciplines
• At Essex we are also working on a paper on corporate governance regulation and indirect productivity effects
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Potential outputs:
• We are working on a joint project literature review for the initiative of Uwe/Ideas factory
• Possibly we will develop one other common working paper, report or edited volume
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The future
• Project still on-going (3 out of 5 RAs still working)– End date: 27 December 2006
• Next few months, as we are finishing the individual components, we will explore how the follow-up project should look like– Content– Structure/process
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The future
• Potential link to new institutions– Allan moves to senior position in two new research
centres at LMU– Gerben moves to LSE and will explore links with the
Centre for the Assessment of Risk and Regulation (CARR)
– Stavroula moves to Royal Holloway
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Conclusion:
• Substantial progress made so far
• Project has aimed to maximise the benefits from multidisciplinary background investigators
• Several potential original contributions made within and across the constituent disciplines
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Conclusion:
• Positive outlook for the future
– Given progress made so far
– New institutional dimensions/inputs
– Reinforcement link to regulation research elsewhere
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Performance Measurement, Regulation and UK Productivity
A Multidisciplinary Overview of
Unintended and Indirect Effects
Ideas factory Presentation, 10 July 2006
Gerben Bakker, Stavroula Iliopoulou, Joseph Antony, Vlado Balaz, Anjula Gurtoo, Rosalind Rae, Kim Tan,