Home | Business News | Browse by Publication | I | International Advances in Economic Research

Rate of return regulation: the case of Spanish ports.

Article Excerpt
Abstract

An original model is put forward in this article to explain and consider the behavior of some of the most important public services in Spain. The cost function approach and the input distance function approach are used to estimate the existence of overcapitalization as a result of rate of return regulation. The results show that overcapitalization generated by this regulation is too significant not to be taken into account. (JEL L51, L52, L59, L95, L97, L98)

Introduction

The regulation system of a large part of Spanish public services, such as those provided by ports, airports, electrical companies, the motorway concessionary companies, and water and gas companies, work as monopolies in a given area. In order to correct the adverse effects (referred to a loss in welfare) of such monopolies, the Spanish administration intervenes by fixing a rate of return. In Spain, all the ports are owned by the public administration and the rate of return is determined by a national agency [Ente Publico Puertos del Estado (State Ports Public Entity)]. The process of regulation of the rate of return is similar to that of the U.S., so that readers can compare the results of this study with those of similar studies carried out in the US. This system in Spain is based on a tradition that goes back to the mid-1970s, nevertheless, nobody has considered the effects of such a regulation. With this purpose, we have estimated the optimum quasi-fixed factor for a data panel of Spanish ports during the 1985-97 period, and compared this with that employed in the short run. In order to measure capital stock over utilization, we employ the traditional cost function and, alternatively, the input distance function, which is the dual of the former. While the cost function has been widely applied in theoretical and empirical research, the input distance function has been nearly the sole object of theoretical research.

The second aim of this study will consist of finding out the cost function goodness in order to quantify the assumed overcapitalization in contrast with the input distance function. In fact, although both functions fully represent technology, the input distance function starts from significant advantages. It does not assume cost minimization and it is not necessary to know the production input prices for its estimation. These advantages are especially important in the Spanish port sector, in which the cost minimization assumption is in doubt due to its public and regulated feature and the input market may not be competitive (the non-competitive market inputs are labor and capital; energy is competitive).

This research is arranged as follows. In the first section, we analyze the possibility of obtaining a measure of the optimal quasi-fixed input through the following alternative methods: cost function and input distance function. In the second section we present the empirical models based on both technology representations, discuss the data employed, and present the empirical results analyzing the differences between both methods. Finally, third section presents the main conclusions.

Obtaining the Optimal Capital Stock Level Through the Cost Function

As shown in [Oum and Waters II, 1997], when firms are suspected of being in disequilibria with respect to one or more quasi-fixed inputs, a means of estimating the disequilibria short-run total cost function consists of adding to the estimated variable cost function the quasi-fixed input cost. This approximation, from Caves et al. [1981], has been also used by Caves et al. [1980], Morrison [1988], Friedlaender et al. [1993], and Nemoto et al. [1993]. Under this approach, the inefficiency measure in the optimal quasi-fixed input allocation of a...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!