Career Concerns, Inaction, and Market Inefficiency: Evidence from Utility Regulation

We study how incentive conflicts known as “career concerns” can generate inefficiencies not only within firms but also in market outcomes. Career concerns may lead agents to avoid actions that, while value-increasing in expectation, could potentially be associated with a bad outcome. We apply this theory to natural gas procurement by regulated public utilities and show that career concerns may lead to a reduction in surplusincreasing market transactions during periods when the benefits of trade are likely to be greatest. We show that data from natural gas markets are consistent with this prediction and difficult to explain using alternative theories. Borenstein: Energy Institute at Haas (ei.haas.berkeley.edu); Haas School of Business, University of California, Berkeley (faculty.haas.berkeley.edu/borenste); and National Bureau of Economic Research (www.nber.org). Email: [email protected]. Busse: Kellogg School of Management, Northwestern University, and NBER. Email: [email protected]. Kellogg: Department of Economics, University of Michigan, and NBER. Email: [email protected]. We are grateful for helpful contributions from Lucas Davis, Paul Gertler, Erin Mansur, Steve Tadelis, Matt White, and Frank Wolak and from seminar participants at U.C. Berkeley, the U.C. Energy Institute, the University of Michigan, and NBER. Special thanks to Koof Kalkstein for sharing his extensive knowledge of the natural gas markets with us. We are grateful to the OpenLink Fund within U.C. Berkeley’s Coleman Fung Risk Management Research Center for financial support.