DP2619 Investment, Reprocurement and Franchise Contract Length in the British Railway Industry

Author(s): Luisa Affuso, David M G Newbery
Publication Date: November 2000
Keyword(s): Contracts, Investment, Panel Data, Railways
JEL(s): C23, D23, L22
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2619

This Paper studies the interaction between repeated auctions of rail franchises of different lengths, uncertainty, and incentives for investment in rolling stock, following the privatization of British Rail. Theoretical predictions are tested empirically using a unique panel of data. Theory suggests that short franchise lengths reduce incentives to invest in specific assets. Our empirical results suggest that competition and strategic behaviour at the re-procurement stage can create incentives for delayed investment. Investing just before the end of the franchise enhances the incumbent?s probability of having the contract re-awarded and provides it with a first-mover advantage, while raising the entry cost for other potential bidders.