You might hear, in many cases, the well-known phrase "the grass is always greener on the other side," which suggests that people often believe other people always seem to be in a better situation than you, although they may not be. In other words, we are always tempted by and envious of what other people have, and we always compare ourselves to others, our neighbors, for example. Is it a good idea to do so?
Firstly, it’s natural to compare your situation or other situations
with others, especially when it feels like they have a better one, especially
in finance. However, it's important to
remember that everyone's financial circumstances are unique, and what might
seem better on the surface might not actually be so. On the other hand, it is
not such a bad idea, and in any case, cases might result in competition with a
favorable outcome.
This form of
competition, known as a Yardstick Competition, refers to a regulatory approach
where the performance of one firm is evaluated relative to others in the same
industry. This is common in industries where natural monopolies exist, like
utilities. Instead of directly controlling prices or profits, regulators use
the performance of other firms as a benchmark (a "yardstick") to set
standards or incentives for the firm being regulated.
Yardstick competition is primarily used in industries where
firms operate under similar conditions, making it easier for regulators to
compare their performance. It’s particularly prevalent in regulated industries
such as utilities (electricity, water, gas), where competition is either
limited or nonexistent due to the nature of the industry.
The first to analyze this approach was Andrei Shleifer. His
theory of yardstick competition, introduced in his 1985 paper (link),
is an influential concept in economics, particularly in the context of regulated
industries or public sector performance. The basic idea is that in markets
where direct competition is limited or nonexistent (such as monopolies or
oligopolies), regulators or policymakers can use the performance of similar
firms as a benchmark or "yardstick" to judge the efficiency and
pricing of a given firm.
Key Concepts:
- Benchmarking
Performance: Regulators compare the performance of a regulated firm
(like a utility company) against similar firms in other regions or
countries. The idea is to use the performance of other firms as a standard
or "yardstick" to assess whether the regulated firm is operating
efficiently.
- Incentives
for Efficiency: Since the firm knows that its performance will be
compared to others, it has an incentive to operate efficiently. If it
doesn't, it risks penalties or stricter regulations, or it might lose its
favorable standing with the regulator.
- Asymmetric
Information: One of the challenges in regulation is that the firm
typically has more information about its costs and operations than the
regulator does. Yardstick competition helps mitigate this problem by using
external comparisons as a way to infer whether a firm’s reported costs are
reasonable.
- Application
in Regulation: This theory is particularly useful in industries like
utilities (electricity, water, etc.), where direct competition is not
feasible. By using yardstick competition, regulators can simulate
competitive pressures and encourage efficiency, even in the absence of
actual competition.
Practical Implications:
- Utility
Regulation: Regulators might compare the cost structures and service
quality of electricity providers in different regions to set appropriate
tariffs.
- Public Sector Performance: Governments could compare the performance of public hospitals or schools across regions to identify inefficiencies and promote best practices.
The main question is how we can apply Shleifer’s theory
of yardstick competition in everyday life.
Applying the theory of yardstick competition to an
individual in everyday life can be thought of as using comparative analysis to
make better decisions, whether it’s in financial matters, purchasing goods, or
evaluating services. Here's how you can use this concept practically:
1. Comparison Shopping
- What
It Is: Just like regulators compare companies to assess efficiency, you
can compare different products or services to ensure you’re getting the
best deal.
- How
to Apply: Before making a purchase, look at multiple options. For example,
if you're buying a car, compare the price, features, and reliability of
similar models across different brands. This will help you identify which
option offers the best value.
2. Assessing Financial Products
- What
It Is: When considering loans, insurance, or investment products, compare
the terms and conditions offered by different providers.
- How
to Apply: If you’re looking at getting a mortgage or a loan, don’t just go
with the first offer. Instead, compare interest rates, fees, and terms
from multiple lenders. This helps ensure you’re getting a competitive
rate, similar to how a regulator would benchmark a utility company’s
rates.
3. Evaluating Service Providers
- What
It Is: Just as regulators evaluate service quality across firms, you can
assess different service providers (e.g., contractors, doctors, tutors)
based on their performance.
- How
to Apply: When hiring a service provider, check reviews, ask for
recommendations, and compare their rates and quality of work against
others. This helps ensure that you’re choosing someone who provides good
value for the cost.
4. Budgeting and Personal Finance
- What
It Is: Compare your spending habits, savings, or investment returns
against common benchmarks or averages.
- How
to Apply: For example, compare your savings rate to the national average
or to your peers. If others are saving a higher percentage of their
income, this could motivate you to adjust your budget and increase your
savings.
5. Job Market Decisions
- What
It Is: In the job market, compare salaries, benefits, and job conditions
across similar roles or industries.
- How
to Apply: Before accepting a job offer, compare the salary and benefits to
what’s typical in your industry. You can use resources like salary surveys,
or job market reports to ensure you’re being offered a competitive
package.
6. Home Maintenance and Repairs
- What
It Is: Compare quotes from different contractors for home repairs or
maintenance work.
- How
to Apply: If you need a repair done, get quotes from several contractors.
Compare not just the price but also the reputation, guarantees, and
quality of materials used. This ensures you’re getting a fair deal.
7. Improving Personal Efficiency
- What
It Is: Just as companies are encouraged to operate efficiently through
yardstick competition, you can look for ways to improve your personal
productivity.
- How
to Apply: Compare your productivity or time management skills against
others, or use tools like time-tracking apps to see how you can optimize
your daily routines.
What teaches us about Yardstick Competition is that by
regularly comparing your options and performance against relevant benchmarks,
you can make more informed decisions and potentially improve your financial and
personal outcomes, similar to how Yardstick Competition encourages efficiency
in businesses. Since a person can not compete with themselves and a benchmark
is needed, this approach could result in a profitable outcome.
The pictures in this post were taken from Unsplash.
