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Yardstick Competition and Investment Incentives

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  • Dag Morten Dalen

Abstract

This paper analyzes how firms' investment incentives are affected by yardstick competition in a situation in which the regulator is unable to commit himself to the regulatory contract before firms invest. Despite its rent‐extracting property, yardstick competition does not necessarily reduce efficiency‐improving investment. Considering firm‐specific investment, yardstick competition is shown to increase investment incentives over individual regulation affirms. In this case, therefore, yardstick competition both reduces the regulator's informational problem ex post and strengthens the firms' investment incentives ex ante. If instead investment is industry‐specific, incentives to invest are lowered by yardstick competition.

Suggested Citation

  • Dag Morten Dalen, 1998. "Yardstick Competition and Investment Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 105-126, March.
    • Handle: RePEc:bla:jemstr:v:7:y:1998:i:1:p:105-126
    DOI: 10.1111/j.1430-9134.1998.00105.x
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