Economic institutions and institutional change in the United States electric power industry

Historical data from the U.S. electric power industry was used to test two theories of institutional change. A transactions costs theory based on the neoclassical model was tested against a strategic bargaining model of institutional change. A comparative test of the two models supports the strategic bargaining theory, finding that relative bargaining power can influence the course of institutional change when the power advantage is held by a player who expects to reap economic gains from the change. This result has implications for expectations regarding the nature of economic institutions in that efficient institutions would not be expected to emerge if outcomes are determined by asymmetries in bargaining power. Estimation of a cost function using recent firm-level panel data from the electric power industry found no statistically significant cost differentials between publicly owned and privately owned electric utilities. Transactions costs, measured at the level of the firm, were included as an explanatory variable. The model was estimated as a one-way, fixed effects model to account for institutional variation between firms. Institutional variation was found to lead to cost differentials between individual firms, but not by ownership sector. The cost functions estimated were found to differ structurally by ownership sector, suggesting that public and private electric utilities may utilize different input combinations.