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Economic Integration and Investment Incentives in Regulated Industries

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  • 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 cost-reducing 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.

Suggested Citation

  • Auriol, Emmanuelle & Biancini, Sara, 2009. "Economic Integration and Investment Incentives in Regulated Industries," CEPR Discussion Papers 7296, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7296
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    Cited by:

    1. Antonio Estache, 2010. "Infrastructure Policy for Shared Growth Post-2008: More and Better, or Simply More Complex ?," Working Papers ECARES ECARES 2010-032, ULB -- Universite Libre de Bruxelles.
    2. Antonio Estache & Liam Wren-Lewis, 2012. "Supranational Infrastructure Regulation: Institutional Opportunities and Challenges," Working Papers ECARES ECARES 2012-025, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    Competition; investment; market integration; Regulation;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock

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