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Investment, Reprocurement and Franchise Contract Length in the British Railway Industry

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  • Affuso, Luisa
  • Newbery, David M G

Abstract

This Paper studies the interaction between repeated auctions of rail franchises of different lengths, uncertainty, and incentives for investment in rolling stock, following the privatization of British Rail. Theoretical predictions are tested empirically using a unique panel of data. Theory suggests that short franchise lengths reduce incentives to invest in specific assets. Our empirical results suggest that competition and strategic behaviour at the re-procurement stage can create incentives for delayed investment. Investing just before the end of the franchise enhances the incumbent’s probability of having the contract re-awarded and provides it with a first-mover advantage, while raising the entry cost for other potential bidders.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2619.

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Date of creation: Nov 2000
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Handle: RePEc:cpr:ceprdp:2619

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Related research

Keywords: Contracts; Investment; Panel Data; Railways;

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References

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  1. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  2. Andrew B. Abel & Janice C. Eberly, 1993. "An Exact Soultion for the Investment and Market Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility," NBER Working Papers 4412, National Bureau of Economic Research, Inc.
  3. Pittman, Russell, 1992. "Specific Investments, Contracts, and Opportunism: The Evolution of Railroad Sidetrack Agreements," Journal of Law and Economics, University of Chicago Press, vol. 34(2), pages 565-89, October.
  4. Andrew B. Abel & Janice C. Eberly, 1993. "A Unified Model of Investment Under Uncertainty," NBER Working Papers 4296, National Bureau of Economic Research, Inc.
  5. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
  6. Perry, Martin K., 1989. "Vertical integration: Determinants and effects," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 4, pages 183-255 Elsevier.
  7. Grimm, Curtis M & Winston, Clifford & Evans, Carol A, 1992. "Foreclosure of Railroad Markets: A Test of Chicago Leverage Theory," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 295-310, October.
  8. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  9. Boozer, Michael A., 1997. "Econometric Analysis of Panel Data Badi H. Baltagi Wiley, 1995," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October.
  10. Guiso, L. & Parigi, G., 1996. "Investment and Demand Uncertainty," Papers 289, Banca Italia - Servizio di Studi.
  11. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  12. Pittman, Russell W, 1990. "Railroads and Competition: The Santa Fe/Southern Pacific Merger Proposal," Journal of Industrial Economics, Wiley Blackwell, vol. 39(1), pages 25-46, September.
  13. Louis S. Thompson & Karim-Jacques Budin, 1997. "Global Trend to Railway Concessions Delivering Positive Results," World Bank Other Operational Studies 11563, The World Bank.
  14. Edlin, Aaron S & Reichelstein, Stefan, 1996. "Holdups, Standard Breach Remedies, and Optimal Investment," American Economic Review, American Economic Association, vol. 86(3), pages 478-501, June.
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Cited by:
  1. Rico Merkert, 2005. "Die Reorganisation und Zukunft des Eisenbahnwesens in Großbritanien," Volkswirtschaftliche Diskussionsbeiträge 78, Universität Potsdam, Wirtschafts- und Sozialwissenschaftliche Fakultät.
  2. Newbery, David M., 2003. "Network capacity auctions: promise and problems," Utilities Policy, Elsevier, vol. 11(1), pages 27-32, March.
  3. Ivaldi, Marc & Seabright, Paul, 2003. "The Economics of Passenger Rail Transport: A Survey," IDEI Working Papers 163, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Rob Aalbers & Victoria Shestalova & Sander Onderstal, 2004. "Better safe than sorry? Reliability policy in network industries," CPB Document 73, CPB Netherlands Bureau for Economic Policy Analysis.

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