Excessive entry and investment in deregulated markets: Evidence from the electricity sector*

The staggered and partial restructuring of state electricity markets beginning in 1996 is leveraged to identify the effect of entry deregulation on investment in generation capacity during the U.S. Gas Boom. Using synthetic control to construct the counterfactual outcome, this paper finds restructuring led to a 17 percent increase in capacity beyond the counterfactual in the seven years following restructuring. The overinvestment of the electricity industry is consistent with market coordination failure, contagion and low real interest rates, leading to an environmental welfare gain of $27.6 billion but overall net welfare loss of $18.85 billion.