Yardstick Regulation in the Japanese Railway Industry

The existing studies that investigate the effectiveness of yardstick regulation in the Japanese railway industry have presented conflicting conclusions. These previous studies have either compared results before and after the introduction of the yardstick regulation in 1997 or compared companies under yardstick regulation with those not under yardstick regulation. In contrast, this study focuses on fare revision and its role in yardstick regulation. In this context, this study reviews these previous studies and presents one hypothesis: that fare revisions have impacted the effectiveness of yardstick regulation in Japan. To assess this, we calculate the Malmquist productivity index for 15 large private railway companies using data envelopment analysis. We examine our hypothesis by comparing the differences in productivity between companies that revised their fares and those that did not. We find that the fare revision companies grew their productivity for three years before their fare revisions compared with the non-revision companies with this difference being statistically significant. One reason for this is likely that the period used for calculating the standard cost by regulators is three years. Hence, the difference between these two groups after the fare revision and during the whole period was not significant. In other words, the effect of the yardstick regulation on productivity was restricted to the three years before fare revisions