nep-reg New Economics Papers
on Regulation
Issue of 2010‒05‒22
23 papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The Case for Constructive Ambiguity in a Regulated System: Canadian Banks and the ‘Too Big To Fail’ Problem By Ellen Russell
  2. Illiquidity and All Its Friends By Tirole, Jean
  3. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts By Farhi, Emmanuel; Tirole, Jean
  4. Energy Regulation in a Low Carbon World By Richard Green
  5. Using Forward Contracts to Reduce Regulatory Capture By Felix Hoeffler; Sebastian Kranz
  6. Managing Investment Risk in Defined Benefit Pension Funds By Dorothee Franzen
  7. Think Globally, Act Locally? Stock vs Flow Regulation of a Fossil Fuel By Amigues, Jean-Pierre; Chakravorty, Ujjayant; Moreaux, Michel
  8. Contracting and Regulation under the Threat of Duplication By Jullien, Bruno; Pouyet, Jérôme; Sand-Zantman, Wilfried
  9. Competition Among Spatially Differentiated Firms: An Empirical Model with an Application to Cement By Russell Pittman
  10. Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry By Bardey, David; Bommier, Antoine; Jullien, Bruno
  11. Preliminary principles to guide best practice water quality regulation from an economic perspective By Coggan, Anthea; Whitten, Stuart; Greyling, Teritus
  12. European Takeover Law: The Case for a Neutral Approach By Luca Enriques
  13. Agribusiness Firm Reactions to Regulations: The Case of Investments in Traceability Systems By Heyder, Matthias; Hollmann-Hespos, Thorsten; Theuvsen, Ludwig
  14. Private Regulation by Platform Operators – Implications for Usage Intensity By Claussen, Jörg; Kretschmer, Tobias; Mayrhofer, Philip
  15. Investment in Transport Infrastructure, and Gas-Gas Competition By Gasmi, Farid; Oviedo, Juan Daniel
  16. Stress Testing Credit Risk: The Great Depression Scenario By Simone Varotto
  17. Does Competition Among Medicare Advantage Plans Matter?: An Empirical Analysis of the Effects of Local Competition in a Regulated Environment By Abe Dunn
  18. Mobile Termination and Mobile Penetration By Hurkens, Sjaak; Jeon, Doh-Shin
  19. Food Ethics, Traceability and the Regulatory State: Private Governance and Civil Society Trajectories By Barling, David
  20. China’s Environmental Policy: A Critical Survey By Gregory C. Chow
  21. Against the Stand-Alone-Cost Test in U.S. Freight Rail Regulation By Russell Pittman
  22. Private Antitrust Enforcement in the Presence of Pre-Trial Bargaining By Bourjade, Sylvain; Rey, Patrick; Seabright, Paul
  23. Economic Integration and Investment Incentives in Regulated Industries By Auriol, Emmanuelle; Biancini, Sara

  1. By: Ellen Russell
    Abstract: This brief focuses on the purported Canadian virtues of risk aversion and regulatory caution in light of one important characteristic of the banking system: it is dominated by only five large banks that are “too big to fail.” I address the issue using a concept – ambiguity – which is often mentioned but relatively neglected analytically in the scholarly literature on bank regulation. I argue that the capacity of the Canadian banking system to successfully navigate the “too big to fail” problem presents an instance in which this form of ambiguity may contribute to helpful dynamics in the regulatory landscape, in that it can attenuate the moral hazard dilemma posed by banks that are “too big to fail.” I discuss the ways in which the refusal to permit mergers among the large Canadian banks in the late 1990s shaped the constructive ambiguity animating the relationships among the banks, the Bank of Canada, and bank regulators. I will argue that this policy decision both enhanced the credibility of the government’s constructive ambiguity and attenuated the moral hazard implications of banks that are “too big to fail” in Canada. I conclude with a discussion of the implications of this analysis for regulatory initiatives going forward.
    JEL: L5 G28
    Date: 2010
  2. By: Tirole, Jean (University of Toulouse Capitole)
    Abstract: The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macroprudential policies.
    JEL: E44 E52 G28
    Date: 2009–09–12
  3. By: Farhi, Emmanuel; Tirole, Jean
    Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities haver little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, macro-prudential supervision is called for. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts.
    JEL: E44 E52 G28
    Date: 2009–06
  4. By: Richard Green
    Abstract: This chapter discusses the implications of an increasing proportion of renewable energy for the way in which energy companies are regulated. While the scope of regulation varies from country to country, depending on the degree of liberalisation, an increase in the overall cost of energy, and a shift from operating to capital costs will be relevant for all regulators. Where there is third party access to transmission, the tariffs may need to send stronger signals of the relative costs imposed by generators in different places, and may have significant effects on their profitability. Regulators responsible for generation revenues will have to allow peaking plants to recover their costs, even if those are rarely-used reserves to cope with intermittent renewable generation. Regulators in control of final prices charged to consumers will probably have to pass on a higher cost of energy, and determine how much is paid by different groups. The shift to renewable energy, however, will not change the fundamental tasks or nature of economic regulation.
    Keywords: Economic regulation, renewable energy, electricity, transmission pricing
    JEL: L94 Q42 L95
    Date: 2010–01
  5. By: Felix Hoeffler (Department WHU - Otto Beisheim School of Management); Sebastian Kranz (Bonn Graduate School of Economics, University of Bonn)
    Abstract: A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.
    Keywords: incentive regulation, regulatory capture, virtual power plants
    JEL: L42 L51 K23 L94
    Date: 2010–02
  6. By: Dorothee Franzen
    Abstract: This paper inquires into the forces that drive the practice of risk management at defined benefit (DB) pension funds in Germany, Netherlands, United Kingdom and the United States in the aftermath of the perfect pension storm. First, pension funds‘ risk management is grounded in the context of the development of modern risk management in the financial industry more general. Second, focusing solely on single-employer sponsored DB pension funds this research critically examines the impact of recent changes in the regulatory and accounting environment for pension funds and their sponsors thereby explicitly taking into account the specific governance context in which pension funds are situated. The aim of this research is, first, to provide a better understanding of the investment risk management of DB pension funds thereby contributing to the theory of financial decision-making. Second, by conducting this analysis on a cross-country basis, this research aims at contributing to the comparative analysis of pension funds. This paper argues that the risk-taking capacity is a central element of DB pension funds. The empirical results suggest that in general risk management has become much more sophisticated but that it is often driven more by regulatory and accounting issues than by the pension fund‘s specific risk profile. Furthermore, changes to the regulatory and accounting standards increasingly impede the risk-taking capacity of DB pension funds. This research draws on in-depth interviews with market participants within the pension fund industry and their advisers.<P>Les dispositifs de retraite à prestations définies et la gestion du risque d’investissement<BR>Le présent document analyse les ressorts de la gestion des risques telle qu’elle est pratiquée par les dispositifs de retraite à prestations définies en Allemagne, aux États-Unis, aux Pays-Bas et au Royaume-Uni au lendemain de la violente tempête qui a ébranlé le secteur des retraites. Premièrement, cette gestion des risques s’ancre dans le contexte plus général de l’élaboration d’une gestion des risques moderne par le milieu de la finance. Deuxièmement, en s’attachant exclusivement aux dispositifs à prestations définies mono-employeurs, ce document examine d’un point de vue critique les répercussions des évolutions récentes du cadre réglementaire et comptable applicable aux régimes de retraite et à leurs promoteurs, prenant ainsi explicitement en compte les mécanismes de gouvernance spécifiques de ces régimes. L’objectif de cette étude est, dans un premier temps, de mieux appréhender la gestion du risque d’investissement par les dispositifs de retraite à prestations définies, et d’étayer ainsi la théorie de la décision financière. En s’intéressant à plusieurs pays, les auteurs de ce document entendent dans un deuxième temps contribuer à l’analyse comparative des régimes de retraite. Ils font ainsi valoir que la capacité de prendre des risques est fondamentale pour les dispositifs à prestations définies. Les résultats empiriques donnent à penser que de manière générale, la gestion des risques a sensiblement gagné en complexité, mais qu’elle dépend souvent davantage de problématiques réglementaires et comptables que du profil de risque propre aux dispositifs de retraite à prestations définies. De plus, les modifications des normes réglementaires et comptables pèsent de plus en plus sur l’aptitude de ces régimes à prendre des risques. Ce document s’appuie sur des entretiens approfondis menés avec des participants au marché des retraites et leurs conseillers.
    Keywords: governance, investment, regulation, pension fund, defined benefit, réglementation, gestion des risques, prestation définie, gouvernance, dispositifs de retraite
    JEL: G23 J32
    Date: 2010–03
  7. By: Amigues, Jean-Pierre (Toulouse School of Economics (INRA, IDEI and LERNA)); Chakravorty, Ujjayant (University of Alberta); Moreaux, Michel (Toulouse School of Economics (IUF, IDEI and LERNA))
    Abstract: Regulation of environmental externalities like global warming from the burning of fossil fuels (e.g., coal and oil) is often done by capping both emission flows and stocks. For example, the European Union and states in the Northeastern United States have introduced caps on flows of carbon emissions while the stated goal of the Intergovernmental Panel on Climate Change (IPCC) which provides the science behind the current global climate negotiations is to stabilize the atmospheric stock of carbon. Flow regulation is often local or regional in nature, while stock regulation is global. How do these multiple pollution control efforts interact when a nonrenewable resource creates pollution? In this paper we show that local and global pollution control efforts, if uncoordinated, may exacerbate environmental externalities. For example, a stricter cap on emission flows may actually increase the global pollution stock and hasten the date when the global pollution cap is reached.
    JEL: Q12 Q32 Q41
    Date: 2009–11
  8. By: Jullien, Bruno; Pouyet, Jérôme; Sand-Zantman, Wilfried
    Date: 2009–07
  9. By: Russell Pittman (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: Recent rate increases by U.S. freight railroads have refocused attention on regulation, deregulation, and regulatory reforms in the railroad industry. Legislation introduced into Congress would render a variety of railroad behavior newly subject to the jurisdiction of the antitrust statutes, with potential enforcement by the Antitrust Division and the FTC and through lawsuits brought by state attorneys general or private parties. This paper considers the economic issues raised by legislation and the likely impacts on competition and welfare.
    Keywords: freight railroads, captive shippers, antitrust, regulation
    JEL: K21 K23 L41 L42 L43 L51 L92
    Date: 2010–01
  10. By: Bardey, David; Bommier, Antoine; Jullien, Bruno
    JEL: I18 L11 L15 L51
    Date: 2009–07
  11. By: Coggan, Anthea; Whitten, Stuart; Greyling, Teritus
    Abstract: Regulatory regimes intended to enforce changes to land use or management impose costs on landholders and governments. Landholder costs comprise changes to capital equipment, changes to crop or enterprise management including direct compliance costs, opportunity costs of lost production, and transaction costs from informing themselves about regulatory requirements, potential compliance strategies and administration associated with implementation of these strategies. Governments must design and implement the regulatory framework along with an appropriate compliance structure and other associated costs. In this paper we apply economic theory, in particular relating to institutional economics and transaction costs, and the degree of heterogeneity landholder net cost to propose a set of principles to guide selection of appropriate regulatory targets and design of implementation frameworks.
    Keywords: diffuse source pollutants, regulations, economic efficiency, transaction costs, water quality, Resource /Energy Economics and Policy,
    Date: 2010
  12. By: Luca Enriques (Consob, University of Bologna, Faculty of Law, and European Corporate Governance Institute (ECGI))
    Abstract: This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers’ and block-holders’ incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeover-neutral intervention of the EC in the area of takeover regulation (pre-emption of “takeover-hostile,” protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers’ and dominant shareholders’ opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.
    Keywords: Takeover Bid Directive, Board Neutrality, Mandatory Bid Rule, Market for Corporate Control
    JEL: K22 G34 G38
    Date: 2010–04
  13. By: Heyder, Matthias; Hollmann-Hespos, Thorsten; Theuvsen, Ludwig
    Abstract: Markets for agricultural and food products are characterized by high information asymmetries since producers, processors and retailers are in most cases much better informed about the quality of their products than consumers (Henson/Traill 1993). Often consumers are only at (prohibitively) high costs or not at all able to control important quality criterions such as food safety, nutritional value or region of origin. Such credence attributes can result in market failure due to a lack of credible information in the market (Akerlof 1970). As a result, attempts to protect consumers against food hazards, product adulteration and deception have gained much relevance in food supply chains (Deimel et al. 2008). Besides the more or less voluntary private certification schemes that have been established, large parts of the agrifood sector are already mandatorily regulated, especially in Europe. Therefore, in recent years, food law has been undergoing major changes in the European Union (EU) (Theuvsen/Hollmann-Hespos 2007; Haertel: 2007). General Food Law Regulation (EC) 178/2002 and the so-called EU hygiene package (Regulations (EC) 852/2004, 853/2004 and 854/2004) have strongly contributed to a much more intensive regulation of food production. The farm to fork approach laid down in Regulation (EC) 178/2002 has resulted in the obligation to secure âtraceability of food [â¦] at all stages of production, processing and distributionâ (Art. 18).
    Keywords: Agribusiness, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety, Research and Development/Tech Change/Emerging Technologies, Risk and Uncertainty,
    Date: 2009–10
  14. By: Claussen, Jörg; Kretschmer, Tobias; Mayrhofer, Philip
    Abstract: Platforms operators act as private regulators to increase usage and maximize profits. Their goals depend on the development of the platform: overcoming the chicken-egg problem early on requires attracting platform participants while quality becomes more important later on. Private regulators influence third-party business models, entry barriers, and usage intensity. We analyze how drivers of usage intensity on Facebook’s application platform were affected by a policy change that increased quality incentives for applications. This change led to the number of installations of each application becoming less important, applications in more concentrated sub-markets achieving higher usage, and applications staying attractive for longer.
    Keywords: private regulation multi-sided platforms usage intensity
    JEL: L1 L50 O33
    Date: 2010–05
  15. By: Gasmi, Farid; Oviedo, Juan Daniel
    Abstract: This paper develops a simple model in which a regulated (upstream) transporter provides capacity to a marketer competing in output with an incumbent in the (downstream) gas commodity market. The equilibrium outcome of the firms' interaction in the downstream market is explicitly taken into account by the regulator when setting the transport charge. We consider various forms of competition in this market and derive the corresponding optimal transport charge policies. We then run simulations that allow us to perform a comparative welfare analysis of these transport infrastructure investment policies based on different assumptions about the intensity of the competition that prevails in the gas commodity market.
    Keywords: transport capacity investment, regulation, natural gas
    JEL: L51 L91
    Date: 2009–11
  16. By: Simone Varotto (ICMA Centre, University of Reading)
    Abstract: By using Moody's historical corporate default histories we explore the implications of scenarios based on the Great Depression for banks' economic capital and for existing and proposed regulatory capital requirements. By assuming different degrees of portfolio illiquidity, we then investigate the relationship between liquidity and credit risk and employ our findings to estimate the Incremental Risk Charge (IRC), the new credit risk capital add-on introduced by the Basel Committee for the trading book. Finally, we compare our IRC estimates with stressed market risk measures derived from a sample of corporate bond indices encompassing the recent financial crisis. This allows us to determine the extent to which trading book capital would change in stress conditions under newly proposed rules. We find that, typically, banking book regulation leads to minimum capital levels that would enable banks to withstand Great Depression-like events, except when their portfolios have long average maturity. We also show that although the IRC in the trading book may be considerable, the capital needed to absorb market risk related losses in stressed scenarios can be more than twenty times larger.
    Keywords: Credit Risk, Financial Crisis, Economic Capital, Basel II, Liquidity Risk
    JEL: G11 G21 G22 G28 G32
    Date: 2010–03
  17. By: Abe Dunn (Economist, Antitrust Division, U.S. Department of Justice, Washington, DC 20530)
    Abstract: The regulatory oversight of the private Medicare Advantage (MA) program makes the role of competition in this market unclear. This paper empirically examines the impact of competition by measuring the effects of changes in market structure on enrollment. The study examines competition in local geographic markets using county-level enrollment data from 2001-07. I find that an increase in the number of competitors results in an increase in the number of enrollees served ­ consistent with competition motivating firms to provide more generous benefits. Competition also results in an increase in product proliferation, which highlights a dimension of competition not previously examined. Overall, the results are similar to what one might expect in an unregulated environment, suggesting that there are benefits from competition that are not realized by regulation alone.
    Date: 2009–07
  18. By: Hurkens, Sjaak; Jeon, Doh-Shin
    Abstract: In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.
    JEL: D4 L96 K23 L51
    Date: 2009–07–28
  19. By: Barling, David
    Abstract: The agri-food sector has undergone both rapid public regulation and private standards setting in the past two decades engendering new forms of governance of food supply chains. Food safety has been at the forefront of these reforms, but increasingly food standards reflect a range of ethical concerns about food production and supply. The communication of standards with ethical implications to consumers relies upon labelling and marketing but is underpinned by schemes of certification and audit, which in turn entail effective systems of traceability of food products. Traceability reaches from food production and movement through the supply chain to the form of the foodâs consumption. A feature of contemporary governing has been the development of the regulatory state, where the state seeks to widen and lengthen its governing reach through steering and utilising private forms of governance. The regulatory state directs the private sector to effectively self-regulate food supply chains within legally required standards; but this process of governance can be a contest of differing values. At the European level, the revision of European Union (EU) food law (EC 178/2002) has put traceability at the centre of its reform of the governance of supply chains. The promotion of ethical concerns around food standards has emerged from private governance sources â notably civil society based organisations who have sought to promote both particularistic and broader concerns around food production from animal welfare to fair trade. In the corporate sector both manufacturers and retailers, have taken up a wide range of standards and certification schemes which cover ethical as well as other concerns: from integrated farming processes to food assurance schemes to local food provenance schemes. The unfolding scope and nature of ethical concerns around food are explained below. The role of civil society organisations in promoting new standards for food incorporating ethical criteria points to the inter- relationships of the state (including the EU) with the corporate sector and civil society organisations in the unfolding regulation and governance of food supply chains. These regulatory and governance trajectories are examined in more detail to illustrate the different roles that food traceability is being asked to underpin. Amongst these roles, the EUâs sustainability goals for the agri-food sector inter-relate with ethically informed regulations. Yet such is the dynamic and unfolding nature of these trajectories that public regulation can lag behind the private governance initiatives. The different roles that traceability as a policy and governance instrument is being called upon to deliver are dynamic and unfolding. There is an increasing traceability burden and so challenges for both public regulators and private managers of food supply chains.
    Keywords: Agribusiness, Agricultural and Food Policy, Farm Management, Food Consumption/Nutrition/Food Safety, Food Security and Poverty, Political Economy,
    Date: 2009–10
  20. By: Gregory C. Chow (Princeton University)
    Abstract: This paper reviews the basic laws and policies of the Chinese government on environmental problems and discusses the issues in policy implementation, the prospect of solving the environmental problems in the future and some recent successes in the development of alternative energy and in controlling pollution. It also includes two proposals for improving the regulation of industrial pollution in China and for controlling carbon emission in the world.
    Keywords: China, environmental policy, environmental problems, pollution
    JEL: D60 F18 O53 Q52 Q56
    Date: 2010–04
  21. By: Russell Pittman (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)
    Abstract: The stand-alone-cost test has become an expensive, extensive, and time-consuming part of the regulatory practice of the U.S. Surface Transportation Board in the performance of its statutory duty to protect "captive shippers" from monopoly rail rates. Worse, a close examination of the history of its adoption and application suggests only a very tenuous connection with its claimed intellectual foundations, the classic works of Faulhaber (1975) and Baumol, Panzar, and Willig (1982). It is time to retire this tool and replace it with something simpler and more effective and transparent.
    Date: 2010–04
  22. By: Bourjade, Sylvain; Rey, Patrick; Seabright, Paul
    Abstract: We study the effect of encouraging private actions for breaches of competition law. We develop a model in which a plaintiff, who may have private information about whether a breach of law has been committed, decides whether to open a case against a defendant. If opened, the case may be settled out of court or may proceed to full trial. The authorities can facilitate private actions by lowering the costs of opening a case or of proceeding to a full trial, or by raising the damages to be expected in the event of success. We show that facilitating private action increases the number of cases opened and sometimes but not always makes plaintiffs more aggressive in pre-trial bargaining. The latter, if it occurs, tends to make defendants who have committed anti-trust violations more likely to settle than innocent defendants. We also show that for screening to work requires the Court to be committed to rely only on submitted evidence in the case, and not on other possibly relevant background material. We finally study how to design the rules so as to enhance the role of private litigation on antitrust enforcement and prove that it is better to increase damages that to reduce costs of initiating a suit. In particular we find large benefits from introducing a system of compensation for Defendants found non-liable, paid by unsuccessful plaintiffs.
    JEL: K41 K42 L40
    Date: 2009–05
  23. By: Auriol, Emmanuelle; Biancini, Sara
    Abstract: The paper studies the impact of market integration on investment incentives in non-competitive industries. It distinguishes between investment in transportation and production cost-reducing technologies. Each domestic firm is controlled by a national regulator in a common market made of two countries. When public funds are costly, and production costs in the two countries are not very different, business stealing effect decreases welfare in both countries. Welfare increases in both countries when the difference in production costs is large enough. Market integration tends to increase the level of sustainable investment in costreducing technology compared to autarky. This is in contrast with the systematic underinvestment problem arising for transportation facilities. Free-riding reduces the incentives to invest in these public-good components, while business-stealing reduces the capacity for financing new investment.
    Date: 2009–05

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