Economic theory shows that vertical mergers may be used by a monopoly subject to cost-based price regulation to evade regulation. When regulators allow increases in input costs to be passed onto customers, a monopolist that is vertically integrated with an input supplier can earn profits by inflating input costs. I document evidence of regulatory evasion by US electric and natural gas utilities through their purchase of interstate natural gas pipeline capacity. Using a novel data set of vertical relationships between regulated utilities and natural gas pipelines, I show incentives for evasion are widespread in this industry: of US households with gas heating, 53% purchase gas from a utility that is affiliated with a natural gas pipeline. Next, I test whether utilities evade pricing regulation by signing transportation contracts with their pipeline affiliates for capacity in excess of consumer demand for gas. Pipelines nodes under contract with utility affiliates are underutilized by 19.5 percentage points on average, even during days where congestion rents are large, suggesting that regulatory evasion may contribute to overbuilding of the pipeline network. Lastly, I do not find statistically significant evidence that utility affiliates pay higher contract prices on average or face price discrimination by pipelines, but estimate that markups on transportation prices are $3 dollars higher for firms with incentives for regulatory evasion. I develop a simple model of regulatory oversight that shows how asymmetric information can rationalize the limited impact of regulatory evasion on input prices. I estimate that incentives for regulatory evasion have shifted $6.7 billion in excessive input costs onto ratepayers between 2010-2020.
Do firms factor in expected liability costs when entering contracts? This paper evaluates how joint liability laws influence market structure through contracting decisions between upstream and downstream partners. Using data on contracts from 2001-2017 between hazardous waste generators and disposal firms, I investigate whether weak joint liability rules increase the market share of disposal firms with higher rates of spills and accidents. I leverage a natural experiment created by the resolution of circuit split on the extent of joint liability prescribed by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and compare market shares for accident prone disposal firms in circuits where joint liability was weakened to those in circuits where expected liability costs of contracting were not affected. I find that the difference in market share between dirty and clean firms grew 28.7% on average in treated markets after the resolution of the circuit split with the greatest gains going to the dirtiest firms. These results suggest that firms actively make contracting decisions based on expected future liability costs and that removing joint liability rules may have significant effects on the likelihood of environmental damages.
selected work in progress
Bargaining Power and Monopoly: Evidence from Natural Gas Pipelines