Abstract
The purpose of this paper is to examine the effectiveness of yardstick competition under alternative vertical structures in public-utility industries. In particular, the paper focuses on the relationship between its effectiveness and cost complementarities in the technologies of the constituent sectors of the industries. The paper shows that yardstick rules can implement the first-best allocation if public-utility industries are vertically integrated even with cost complementarities. In unbundling supply, however, the sequentiality of investment decisions among the constituent sectors requires the separability of cost complementarities from the private information each sector owns, in order for yardstick rules to achieve an optimal allocation.
