Regulatory Distortions and Capacity Investment: The Case of China’s Coal Power Industry (Job Market Paper)
For roughly two decades, the Chinese government has announced plans to restructure their coal electricity generation market and introduce market-based mechanisms. This transition has left China balancing two countervailing concerns: allocating production production on the electric grid according to an extremely strict and complex regulatory structure, and attracting private capacity investment into this market. Power production is both strictly limited by hard capacity constraints, and power plants tend to exhibit lower costs as they scale up, so the return on capacity investment should be extremely sensitive to production allocation choices. Using a novel dataset on the industry, this paper gauges the effect of China's electricity planning policies on these investment incentives via a structural model, incorporating both a novel approach to identifying misallocation under central planning with hard capacity constraints, as well as a dynamic discrete choice investment model based off of (Rust, 1987). I find that planning policies tend to favor high-cost and smaller plants, at the expense of more technically efficient players. This has dramatic consequences for their investment behavior: a persistent 1 standard deviation shift downward in a firm's allocation index reduces their chance of making a major investment by 19 to 23\%. Counterfactual simulations show that a change of this magnitude significantly increases the cost of production and carbon emissions for a plant over a short time frame.
Restructuring the Chinese Coal Power Market: Revenue vs. Physical Measures (draft available upon request)
This paper measures the effect of a major 2002 restructuring of the Chinese coal power market using newly available physical data on the industry. Two effects are investigated: individual firms growing more or less technically efficient on the intensive margin in response to the policy, and market allocation mechanisms allocating across firms more efficiently given efficiency distributions. To investigate the former I use a novel dataset and a difference-in-differences framework in the spirit of (Fabrizio et al., 2007) and (Gao and Van Biesebroeck, 2014). I find this measures are extremely sensitive to whether physical or revenue-based measures of efficiency are used, in some cases nullifying the positive results of (Gao and Van Biesebroeck, 2014) I find that the reforms also did little to change the optimality of input allocations across plants in the market by either measure.
Heterogeneous Technologies, Productivity and the State Sector in China (joint with Panle Jia Barwick, Shanjun Li, and Yifan Zhang)