This presentation is based on a paper co-authored by Carlo Cambini (Politecnico di Torino), Elena Fumagalli (DIG_Politecnico di MIlano, IEFE-Bocconi University) and Laura Rondi (DIGEP-Politecnico di Torino, CERIS-CNR-Moncalieri-Torino).

This paper focus on output-based regulation and empirically investigates the effect of rewards and penalties schemes on the firms’ decision to use capital and non-capital resources to meet regulatory targets. To this end, we conduct an empirical analysis using micro data for electricity distribution in Italy where outputbased incentives have been applied to indicators of service quality for over a decade. Using a dataset collected with the support of the Italian energy regulatory authority for the period 2004-2009, we first show that service quality is indeed affected by capital and non-capital expenditures. Then, by investigating the causality link between firms’ expenditures and regulatory incentives, we provide evidence that output-based incentives affect capital expenditures, but not vice versa. Lastly, we adopt a more comprehensive approach to investigate the relationship between quality-related incentives and expenditure decisions. Our results reveal an asymmetric effect of rewards and penalties on capital expenditures’ decisions across areas with different quality levels. From these findings we derive several policy implications.

This seminar has been jointly organized by FEEM and IEFE, Bocconi University.