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Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk

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  • Hausman, Jerry
  • Myers, Stewart

Abstract

The Surface Transportation Board (STB) applies the theory of contestable markets to regulate dominant railroad freight movements. The STB bases its determination whether railroad revenues are excessive if they would be more than sufficient to support investment in a hypothetical stand-alone railroad designed to handle the at-issue traffic efficiently. The STB regulatory approach does not take correct account of the importance of sunk costs and irreversible investments in the railroad industry. We estimate how large the mistakes can be by applying a real options approach that takes into account the effect of sunk costs, irreversible investment, and asymmetric returns. Copyright 2002 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 22 (2002)
Issue (Month): 3 (November)
Pages: 287-310

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Handle: RePEc:kap:regeco:v:22:y:2002:i:3:p:287-310

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Web page: http://www.springerlink.com/link.asp?id=100298

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Cited by:
  1. Hirschhausen, Christian von, 2008. "Infrastructure, regulation, investment and security of supply: A case study of the restructured US natural gas market," Utilities Policy, Elsevier, vol. 16(1), pages 1-10, March.
  2. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
  3. Michele Moretto & Paolo M. Panteghini & Carlo Scarpa, 2007. "Profit Sharing and Investment by Regulated Utilities: a Welfare Analysis," "Marco Fanno" Working Papers 0059, Dipartimento di Scienze Economiche "Marco Fanno".
  4. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
  5. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
  6. Bragança, Gabriel & Rocha, Katia & Camacho, Fernando, 2006. "A taxa de remuneração do capital e a nova regulação das telecomunicações
    [Cost of capital and the new regulation of telecommunications services]
    ," MPRA Paper 5400, University Library of Munich, Germany.
  7. Pindyck, Robert S., 2005. "Sunk Costs and Real Options in Antitrust," Working papers 18233, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Paolo Panteghini & Carlo Scarpa, 2008. "Political pressures and the credibility of regulation: can profit sharing mitigate regulatory risk?," International Review of Economics, Springer, vol. 55(3), pages 253-274, September.

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