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Infrastructure Investment in Network industries: The Role of Incentive Regulation and Regulatory Independence


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  • Balázs Égert


This paper finds that coherent regulatory policies can boost investment in network industries of OECD economies. Rate-of-return regulation is generally thought to result in overinvestment, while incentive regulation is believed to entail underinvestment. Yet, previous empirical work has generally found that the introduction of incentive regulation has not systematically changed investment in network industries. According to the theoretical literature, regulatory uncertainty exposes both types of regimes to the danger of underinvestment. However, regulatory uncertainty is arguably higher under rate-of-return regulation because investment decisions (what can be included in the rate base) are usually evaluated in a discretionary manner, while firms operating under incentive regulation are less affected by this behaviour. In addition, incentive regulation encourages investment in cost-reducing technologies. Using Bayesian model averaging techniques, this paper shows that incentive regulation implemented jointly with an independent sector regulator (indicating lower regulatory uncertainty) has a strong positive impact on investment in network industries. In addition, lower barriers to entry are also found to encourage sectoral investment. These results support the importance of implementing policies in a coherent framework. L'investissement dans les industries de réseaux : Le rôle de la régulation incitative et de l'indépendance du régulateur sectoriel Ce document montre que des politiques de régulation cohérentes peuvent encourager l’investissement dans les industries de réseaux. Il est généralement admis que la régulation par le taux de rendement a tendance à causer un surinvestissement, tandis qu’une régulation incitative pourrait produire une situation de sous-investissement. Pourtant, la littérature empirique montre que l’introduction de régimes recourant à l’incitation n’a pas, de manière générale, impacté l’investissement dans les industries de réseaux. D’après la littérature théorique, l’incertitude réglementaire accroît le risque d’un sous-investissement dans les deux types de régime. L’incertitude réglementaire est cependant plus élevée dans un régime par le taux de rendement en raison des décisions discrétionnaires d’investissement (éventuellement inclus dans la base du taux de rendement), alors que les entreprises dans un régime incitatif sont moins affectées par ce genre de décisions. De plus, la régulation incitative favorise l’investissement dans les technologies visant à réduire les coûts. Par des techniques d’estimation bayesienne, ce papier montre qu’une régulation incitative mise en place en même temps qu’un régulateur sectoriel indépendant influence positivement l’investissement dans les industries de réseaux. De plus, la réduction des barrières à l’entrée encourage, elle aussi, l’investissement. Ces résultats soulignent l’importance de la mise en oeuvre cohérente des politiques sectorielles.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 688.

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Date of creation: 27 Mar 2009
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Handle: RePEc:oec:ecoaaa:688-en

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Keywords: network industries; investment; rate-of-return regulation; price cap; regulatory independence; cost-plus regulation; incentive regulation; régulation par le taux de rendement; investissement; régulation; indépendance réglementaire; industries de réseaux; régulation incitative;

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Cited by:
  1. Carlo Cambini & Laura Rondi, 2011. "Independence, Investment and Political Interference: Evidence from the European Union," RSCAS Working Papers, European University Institute 2011/42, European University Institute.
  2. Cambini, Carlo & Spiegel, Yossi, 2011. "Investment and capital structure of partially private regulated firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8508, C.E.P.R. Discussion Papers.
  3. Ingo Vogelsang, 2010. "Incentive Regulation, Investments and Technological Change," CESifo Working Paper Series 2964, CESifo Group Munich.
  4. Carlo Cambini & Laura Rondi, 2010. "Regulatory Independence and Political Interference: Evidence from EU Mixed-Ownership Utilities’ Investment and Debt," Working Papers, Fondazione Eni Enrico Mattei 2010.69, Fondazione Eni Enrico Mattei.
  5. Cambini, Carlo & Franzi, Donata, 2013. "Independent regulatory agencies and rules harmonization for the electricity sector and renewables in the Mediterranean region," Energy Policy, Elsevier, Elsevier, vol. 60(C), pages 179-191.
  6. Bernardo Bortolotti & Carlo Cambini & Laura Rondi, 2011. "Regulatory Independence, Ownership and Firm Value: The Role of Political Institutions," RSCAS Working Papers, European University Institute 2011/43, European University Institute.
  7. Åsa Johansson & Yvan Guillemette & Fabrice Murtin & David Turner & Giuseppe Nicoletti & Christine de la Maisonneuve & Guillaume Bousquet & Francesca Spinelli, 2012. "Looking to 2060: Long-Term Global Growth Prospects: A Going for Growth Report," OECD Economic Policy Papers 3, OECD Publishing.
  8. Jacques Pelkmans & Lionel Kapff, 2010. "Interconnector Investment for a Well-functioning Internal Market. What EU regime of regulatory incentives?," Bruges European Economic Research Papers, European Economic Studies Department, College of Europe 18, European Economic Studies Department, College of Europe.


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