The Market Response to Restructuring: A Behavioral Model

Abstract

In this paper, I model the behavior of producers, consumers, and regulators in deciding to restructure the electricity sector and estimate their equilibrium response to the newly restructured market. The empirical model consists of simultaneous price and restructuring equations with endogenous switching and cross-equation correlation in the errors. This approach allow me to account for the influence of special interest groups and potential selection bias in which countries choose to restructure. I estimate distinct shifts from restructuring in both industrial and residential prices, and for English speaking, Scandinavian, and South American countries. I find that in all countries, it is industrial consumers that experience the price effects of restructuring, while residential consumers remain largely unaffected. In English speaking and Scandinavian countries, industrial prices decrease while in South American countries they increase. This is consistent with the political–economic environment in which these countries have considered restructuring.