Discussion Paper Details

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Title: Economic Integration and Investment Incentives in Regulated Industries

Author(s): Emmanuelle Auriol and Sara Biancini

Publication Date: May 2009

Keyword(s): competition, Investment, market integration and regulation

Programme Area(s): Development Economics and Industrial Organization

Abstract: 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 cost-reducing 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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Bibliographic Reference

Auriol, E and Biancini, S. 2009. 'Economic Integration and Investment Incentives in Regulated Industries'. London, Centre for Economic Policy Research.