Investment Incentives of a Regulated Dominant Firm
AbstractWe study the investment incentives of a regulated, incumbent firm in a deregulation process. The regulator cannot commit to a long-term regulatory policy, and investment decisions are taken before optimal regulatory policies are imposed. We characterize the regulated incumbent's incentive to invest when a deregulation process is initiated and an unregulated firm enters the market as a result. The change in the marginal return to investment depends on how the investment changes the firm's virtual cost--the sum of its physical production and information costs. When the marginal return to investment increases due to deregulation, social welfare increases as a result of higher investment and more competition. Otherwise, the change in social welfare depends on the total of the effects in the fall of investment and increased competition. We also present conditions under which deregulation enhances welfare. Copyright 1999 by Kluwer Academic Publishers
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Bibliographic InfoPaper provided by Boston University - Industry Studies Programme in its series Papers with number 0067.
Date of creation: Apr 1996
Date of revision:
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Postal: Boston University, Industry Studies Program; Department of Economics, 270 Bay Road, Boston, Massachusetts 02215.
Web page: http://www.bu.edu/econ/isp/
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Other versions of this item:
- Biglaiser, Gary & Ma, Ching-To Albert, 1999. "Investment Incentives of a Regulated Dominant Firm," Journal of Regulatory Economics, Springer, vol. 16(3), pages 215-35, November.
- Biglaiser, G. & Ma, C.T.A., 1996. "Investment Incentives of a Regulated Dominant Firm," UFAE and IAE Working Papers 340.96, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- Biglaiser, G. & Ma, C.A., 1996. "Investment Incentives of a Regulated Dominant Firm," Papers 67, Boston University - Industry Studies Programme.
- D20 - Microeconomics - - Production and Organizations - - - General
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
- M10 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - General
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- Ma, Ching-to Albert, 2004. "Public rationing and private cost incentives," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 333-352, January.
- Debande, Olivier, 2001. "Deregulating and privatizing statutory monopolies," Journal of Economics and Business, Elsevier, vol. 53(2-3), pages 111-137.
- Vareda, João, 2007.
"Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction,"
FEUNL Working Paper Series
wp526, Universidade Nova de Lisboa, Faculdade de Economia.
- João Vareda, 2007. "Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction," Working Papers 31, Portuguese Competition Authority.
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