SPATIAL DEPENDENCE THROUGH LOCAL YARDSTICK COMPETITION - THEORY AND TESTING

We propose a model of contracting for natural monopolies in which yard stick evaluation of performance can be optimal. Where principals have partially unobservable objective functions and agents are risk averse an externality is generated which can be observed in patterns of spati al dependence, Imposing standard contracting rules on principals can e liminate the externality and spatial dependence. We test this predicti on using spatial econometrics on UK data covering a regime shift from independent contracting to compulsory competitive tendering rules. (C) 1997 Elsevier Science S.A.