The Japanese Experience
Chapter 11: Yardstick Regulation
Japanese public utility industries seek to improve firms’ managerial efficiency by applying incentive regulations. In Japan, the most common way to encourage efficiency improvement is through the use of yardstick regulation, a regulatory method whereby the regulator evaluates firms’ performance and gives rewards or penalties according to firms’ efficiency level. The firms are in general located in different markets, so that they are not in direct competition. However, competition can be created among these firms by subjecting them to common assessment measures in the form of yardstick regulation, which in Japan is generally used at the price-setting stage and applies to the following public utility industries: electric power, gas, rail, and bus service. This chapter consists of five sections. Following the introduction, the second section, an overview of yardstick regulation, gives a definition of yardstick regulation, explains its theoretical background, outlines the necessary conditions for its application, and identifies the industries to which it is applied. The third section is a summary of how yardstick regulation is applied in practice to four Japanese public utility industries—electric power, gas, rail, and bus service.
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