PhD Candidate, Department of Economics, LSE
Contact information
Email: f.m.blum@lse.ac.uk
Phone number: +44 (0)79 7904 8969
Room number: 32L.3.01
Address: Department of Economics || London School of Economics and Political Science || Houghton Street || London WC2A 2AE
Research interests
Primary Fields: Development Economics
Secondary Fields: Public Economics || Organizational Economics
Job Market Paper
The Value of Discretion: Price-Caps and Public Service Delivery
Abstract
It is often argued that price-caps – a ceiling on prices charged by monopolistic suppliers - are necessary to redistribute surplus and make essential goods and services affordable. I explore if price-caps lead to welfare improvements through a field experiment in which I randomize whether public livestock extension agents are subject to a price-cap or not. This intervention has three effects. First, conditional on being served, the treatment increases the consumer surplus available to recipients: the price-cap reduces average prices by 17% and the within-agent standard deviation of prices by 42%. Second, the intervention increases the affordability of extension services: the price-cap increases the share of previously unserved and needy customers in the beneficiary pool by 15% and 9%, respectively. Third, the price-cap reduces the geographic coverage of services by decreasing the likelihood that agents will serve remote villages by 25%. This suggests that price-cap regulation creates a tension between making services affordable and providing incentives for agents to serve remote recipients. In light of this trade-off, I show that the optimal regulatory policy can be expressed as a function of two sufficient statistics: the elasticity of the proportion of villages served with respect to prices and the elasticity of demand. Calculating the welfare effects, I find that reducing agents’ discretion over prices reduces social welfare.