Incentive regulation: Evidence from German electricity networks

We propose a difference-in-differences (DiD) approach to estimate the impact of incentives on cost reduction. We show theoretically, and estimate empirically, that German electricity distribution system operators (DSOs) incur higher costs when subject to a lower-powered regulation mechanism. The difference is particularly significant (about 7%) for firms in the upper quartile of the efficiency distribution, a pattern which is consistent with the pooling of types under the threat of ratcheting.