Discussing
You Get What You Pay For: Electricity Quality and Firm Response by Meera Mahadevan


Florian Oswald

Firms, Labour Markets, and Development workshop, Colegio Carlo Alberto

23 June, 2023

Overview and Findings of the Paper

Overview

  1. Electricity is a core input both in developing and developed economies.
  1. Electricity in India is supplied very unreliably, severly curtailing economic growth.

This Paper

  1. Uses the staggered introduction of a large reform of the electricity generation and distribution market (all state-owned (?)) to identify effects of different reform types. State of the art DiD and event study methodology employed. 👏
  1. Finds that states who unified distribution network increased electricity reliability. Both prices and consumption increase - high WTP of firms for more reliable electricity!

Findings

  • Increased competition in power distribution does not unequivocally lead to more stable supply and lower prices. Context matters.
  • Electricity price increased significantly with single distributor.
  • The probability of using a generator increases significantly as well in single distributor states.
  • Days worked and total output increase markedly in single distributor states, suggesting that firms are able to scale up operations significantly on the back of stable baseline supply.

Comments

I have three short comments.

Comment 1: Pre-trend in Light Density?

  • Is the black line trending up?
  • Does it matter?
  • What does it mean? (What’s the unit on y-axis?)

  • 🤔 I’m often unsure of what the relevant control group is in settings like this, so please point out.

Comment 2: Suggesting some clarifying edits


  1. Why exactly is electricity unreliable? Problem of generators, or distributors, or both? Clearly spelling out the details would help the reader understand the issues at hand.


  1. Table 1: 220 manufacturing days on average. 5 days x 48 weeks would be 240 days. Why so few days? I guess unstable power supply is a reason, and indeed part of the story, so some highlighting of this in the text would be good.

Comment 3: What Do We Recommend To Do?

  • What is the relationship between large scale infrastructure investments (i.e. big up-front expenditures) and the flow of revenue from consumers when it comes to assuring stable electricity supply?
  • Couldn’t the central government make a big investment into upgrading existing infrastructure with debt financing (say), and rely on consumer subscriptions to pay for (smaller) operating costs?
  • There is a link to other network-based utilities like rail (UK and France, for instance), where central government did the bulk of large initial investment.

This time is different? Irrigation in France 1700-1860.

Rosenthal (1990), The Development of Irrigation in Provence, 1700-1860: The French Revolution and Economic Growth.

Irrigation channels in 18-th century France

  • Rosenthal (1990) shows that France throughout 1700-1860 had insufficient irrigation the Provence region, holding back growth (main sector: agriculture). TFP loss of up to 40%.
  • Resulting growth problem similar to Fried and Lagakos (2020), just substitute water for electricity.
  • Technology and credit were available to private entrepreneurs.
  • Many canal projects failed because of rent extraction downstream along the distribution network.
  • Only after the French Revolution this problem disappeared.

Downstream Rent Extraction in Provence


Rosenthal (1990) p. 625

Downstream Rent Extraction in Provence

Rosenthal (1990) p. 625

Parallels to Rosenthal (1990)?

  • Of course electricity market in India 2023 is significantly different from irrigation water distribution in France in 1700. So, yes, this time is different 😉
  • Both settings, however, highlight the detrimental role inefficient distribution of inputs has on productivity.
  • Potential solutions in both settings have to do with property rights, or market segmentation in the widest sense. More competition will not work in both cases, without caveats.
  • In India it seems to be crucial to allow a distributor to reach a certain size in order to be efficient. In Provence the French Revolution meant that right-of-way was completely centralized, to the benefit of infrastructure projects.

End

Thanks for this nice paper!

References

FLMD workshop 2023 @ CCA, discussant Florian Oswald, SciencesPo Paris

Fried, Stephie, and David Lagakos. 2020. “Electricity and Firm Productivity: A General-Equilibrium Approach.” National Bureau of Economic Research.
Rosenthal, Jean-Laurent. 1990. “The Development of Irrigation in Provence, 1700-1860: The French Revolution and Economic Growth.” The Journal of Economic History 50 (3): 615–38.