Infrastructure quality in deregulated industries: is there an underinvestment problem?
We investigate how various institutional settings affect a network providerï¿½s incentives to invest in infrastructure quality. Under reasonable assumptions on demand, investment incentives turn out to be smaller under vertical separation than under vertical integration, though we also provide counter-examples. The introduction of downstream competition for the market can sometimes improve incentives. With suitable non-linear access prices investment incentives under separation become identical to those under integration.
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