Making Incentive Systems Work: Incentive Regulation in the Nuclear Power Industry

Abstract

Efforts to reform traditional command-and-control regulation have led to use of a variety of incentive programs. State public utilities have regulated experiments to replace some direct controls with performance-based incentive programs. To date, neither the theoretical literature nor the descriptive literature on regulatory performance has identified systematically the features that characterize successful incentive systems. In this article, we use the literature on agency and incentives to develop a core set of propositions that prescribes the conditions under which incentive relations function well; this constitutes a normative theory of incentive system success. We then apply this theory to assess regulatory incentive programs intended to improve efficiency in nuclear power generation. Using a 1987-1990 data set drawn from Department of Energy sources and Nuclear Regulatory Commission sources, we analyze the performance of nuclear plants subject to state incentive programs. Contrary to expectations, the programs did not enhance efficiency, and they even may have challenged safety.