Working paper

Economic Integration and Investment Incentives in Regulated Industries

Emmanuelle Auriol, and Sara Biancini

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 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.

Replaced by

Emmanuelle Auriol, and Sara Biancini, Powering Up Developing Countries through Economic Integration, The World Bank Economic Review, vol. 29, n. 1, 2015, pp. 1–40.

Reference

Emmanuelle Auriol, and Sara Biancini, Economic Integration and Investment Incentives in Regulated Industries, TSE Working Paper, n. 09-039, May 2009.

See also

Published in

TSE Working Paper, n. 09-039, May 2009