Economic Integration and Investment Incentives in Regulated Industries

42 Pages Posted: 15 Jul 2009

See all articles by Emmanuelle Auriol

Emmanuelle Auriol

University of Toulouse 1 - Toulouse School of Economics (TSE); University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE); CESifo (Center for Economic Studies and Ifo Institute)

Sara Biancini

University of Cergy-Pontoise - THEMA

Date Written: May 2009

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.

Keywords: competition, Investment, market integration, regulation

JEL Classification: F12, F15, L43, L51, R53

Suggested Citation

Auriol, Emmanuelle and Biancini, Sara, Economic Integration and Investment Incentives in Regulated Industries (May 2009). CEPR Discussion Paper No. DP7296, Available at SSRN: https://ssrn.com/abstract=1433891

Emmanuelle Auriol (Contact Author)

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE) ( email )

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Toulouse, 31000
France
+33 5 61 12 85 89 (Phone)
+33 5 61 12 86 37 (Fax)

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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Sara Biancini

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France