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Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk

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  • Hausman, Jerry
  • Myers, Stewart

Abstract

The Surface Transportation Board (STB) applies the theory of contestable markets to regulate dominant railroad freight movements. The STB bases its determination whether railroad revenues are excessive if they would be more than sufficient to support investment in a hypothetical stand-alone railroad designed to handle the at-issue traffic efficiently. The STB regulatory approach does not take correct account of the importance of sunk costs and irreversible investments in the railroad industry. We estimate how large the mistakes can be by applying a real options approach that takes into account the effect of sunk costs, irreversible investment, and asymmetric returns. Copyright 2002 by Kluwer Academic Publishers

Suggested Citation

  • Hausman, Jerry & Myers, Stewart, 2002. "Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk," Journal of Regulatory Economics, Springer, vol. 22(3), pages 287-310, November.
  • Handle: RePEc:kap:regeco:v:22:y:2002:i:3:p:287-310
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    Citations

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    Cited by:

    1. Moretto, Michele & Panteghini, Paolo M. & Scarpa, Carlo, 2008. "Profit sharing and investment by regulated utilities: A welfare analysis," Review of Financial Economics, Elsevier, vol. 17(4), pages 315-337, December.
    2. Paolo Panteghini & Carlo Scarpa, 2008. "Political pressures and the credibility of regulation: can profit sharing mitigate regulatory risk?," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 55(3), pages 253-274, September.
    3. Gabriel Fiuza de Bragança & Katia Rocha & Fernando Camacho, 2006. "A Taxa de Remuneração do Capital e a Nova Regulação das Telecomunicações," Discussion Papers 1160, Instituto de Pesquisa Econômica Aplicada - IPEA.
    4. Marcel Boyer, 2010. "The Measure and Regulation of Competition in Telecommunications Markets," Chapters,in: Regulation and the Evolution of the Global Telecommunications Industry, chapter 5 Edward Elgar Publishing.
    5. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
    6. Evans, Lewis & Guthrie, Graeme, 2003. "Asset Stranding is Inevitable: Implications for Optimal Regulatory Design," Working Paper Series 3881, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    7. Robert S. Pindyck, 2005. "Sunk Costs and Real Options in Antitrust," NBER Working Papers 11430, National Bureau of Economic Research, Inc.
    8. Hirschhausen, Christian von, 2008. "Infrastructure, regulation, investment and security of supply: A case study of the restructured US natural gas market," Utilities Policy, Elsevier, vol. 16(1), pages 1-10, March.
    9. Robert S. Pindyck, 2005. "Pricing Capital Under Mandatory Unbundling and Facilities Sharing," NBER Working Papers 11225, National Bureau of Economic Research, Inc.
    10. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    11. Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, May.
    12. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 3851, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    13. Mark Burton & Charles Sims, 2016. "Understanding Railroad Investment Behaviors, Regulatory Processes, and Related Implications for Efficient Industry Oversight," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(2), pages 263-288, September.

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