Catch-up effects and incentive effects: Evidence from regulatory reform in Australian electric distribution utilities

Theoretically, incentive regulation should induce all regulated companies to reduce costs by making them residual claimants. In particular, it should stimulate relatively lower performance companies to cut more costs by an additional "stretch factor" (differentiated efficiency improvement target). This study terms the first as incentive effects and the second as catch-up effects. Using panel data from Australian electric distribution companies, the study aims to identify whether these two effects exist and assess the outcomes of the regulatory reform implemented in 2012. To achieve this, the paper adopts convergence indexes developed by Horta & Camanho (2015) and Camanho et al. (2023), substituting their DEA-based framework with the StoNEZD framework. The newly proposed convergence indexes account for environmental heterogeneity and stochastic error, reflecting purely performance changes due to management efforts in daily operations. Empirical results confirm the existence of both effects, implying that the 2012 reform has produced the expected results. JEL classification C13 · C14 · L51 · L94