This paper investigates the effectiveness of yardstick regulation by using a data set of rail companies in Japan and estimating the variable frontier cost function. In the variable cost function, both the coefficient of the yardstick regulation dummy and the coefficient of the competitive pressure outside the industry show the negative sign with statistical significance, indicating that the introduction of yardstick regulation and competition tend to decrease a rail company’s variable cost. Between 1995 and 2000, railways to which yardstick regulation was applied improved cost efficiency by about 11.5%.
[JEL Classification]: L51, L53, L90, K23
[Key Words]: Yardstick Regulation, Incentive Regulation, Efficiency, Cost Frontier Function