NBER Working Papers and Publications by Steve Cicala

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Working Papers and Chapters and Reporter Articles

April 2017Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios
with Ethan M.J. Lieber, Victoria Marone: w23353
A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims. The Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully-insured commercial markets, thereby capping insurer profit margins, but not levels. While intended to reduce premiums, we show this rule creates incentives analogous to cost of service regulation. Using variation created by the rule's introduction as a natural experiment, we find claims costs rose nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. Premiums were unaffected.
January 2017Imperfect Markets versus Imperfect Regulation in U.S. Electricity Generation
This paper measures changes in electricity generation costs caused by the introduction of market mechanisms to determine output decisions in service areas that were previously using command-and-control-type operations. I use the staggered transition to markets from 1999- 2012 to evaluate the causal impact of liberalization using a nationwide panel of hourly data on electricity demand and unit-level costs, capacities, and output. To address the potentially confounding effects of unrelated fuel price changes, I use machine learning methods to predict the allocation of output to generating units in the absence of markets for counterfactual production patterns. I find that markets reduce production costs by $3B per year by reallocating output among existing power plants: Gains from trade acros...
May 2014When Does Regulation Distort Costs? Lessons from Fuel Procurement in U.S. Electricity Generation
This paper evaluates changes in fuel procurement practices by coal- and gas-fired power plants in the United States following state-level legislation that ended cost-of-service regulation of electricity generation. I find that deregulated plants substantially reduce the price paid for coal (but not gas), and tend to employ less capital-intensive sulfur abatement techniques relative to matched plants that were not subject to any regulatory change. Deregulation also led to a shift toward more productive coal mines. I show how these results lend support to theories of asymmetric information, capital bias, and regulatory capture as important sources of regulatory distortion.

Published: Steve Cicala, 2015. "When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation," American Economic Review, American Economic Association, vol. 105(1), pages 411-44, January. citation courtesy of

March 2011A Roy Model of Social Interactions
with Roland G. Fryer, Jr., Jörg L. Spenkuch: w16880
We develop a Roy model of social interactions in which individuals sort into peer groups based on comparative advantage. Two key results emerge: First, when comparative advantage is the guiding principle of peer group organization, the effect of moving a student into an environment with higher-achieving peers depends on where in the ability distribution she falls and the effective wages that clear the social market. In this sense our model may rationalize the widely varying estimates of peer effects found in the literature without casting group behavior as an externality in agents' objective functions. Second, since a student's comparative advantage is typically unobserved, the theory implies that important determinants of individual choice operate through the error term and may, even unde...

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