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Economic Integration and Investment Incentives in Regulated Industries

  • Auriol, Emmanuelle
  • Biancini, Sara

The paper studies the impact of market integration on investment incentives in non-competitive industries. It distinguishes between investment in transportation and production cost-reducing technologies. Each domestic firm is controlled by a national regulator in a common market made of two countries. When public funds are costly, and production costs in the two countries are not very different, business stealing effect decreases welfare in both countries. Welfare increases in both countries when the difference in production costs is large enough. Market integration tends to increase the level of sustainable investment in costreducing technology compared to autarky. This is in contrast with the systematic underinvestment problem arising for transportation facilities. Free-riding reduces the incentives to invest in these public-good components, while business-stealing reduces the capacity for financing new investment.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 555.

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Date of creation: May 2009
Date of revision:
Publication status: Published in The World Bank Economic Review, vol. 29, n°1, 2015, p. 1-40.
Handle: RePEc:ide:wpaper:20805
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  1. Caillaud, Bernard, 1990. "Regulation, competition, and asymmetric information," Journal of Economic Theory, Elsevier, vol. 52(1), pages 87-110, October.
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  7. repec:adr:anecst:y:1997:i:47:p:05 is not listed on IDEAS
  8. Jamasb, T. & Pollitt, M., 2004. "Electricity Market Reform in the European Union: Review of progress towards liberalisation and integration," Cambridge Working Papers in Economics 0471, Faculty of Economics, University of Cambridge.
  9. Auriol, Emmanuelle & Picard, Pierre M., 2006. "Infrastructure and public utilities privatization in developing countries," Policy Research Working Paper Series 3950, The World Bank.
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  15. Sara Biancini, 2008. "Regulating National Firms in a Common Market," CESifo Working Paper Series 2209, CESifo Group Munich.
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