Working paper

Welfare Tradeoffs in U.S. Rail Mergers

Marc Ivaldi, and Gerard J. Mccullough

Abstract

The renegotiation of regulatory contracts is known to prevent regulators from achieving the full commitment efficient outcome in dynamic contexts. However, assessing the cost of such renegotiation remains an open issue from an empirical viewpoint. To address this question, we fit a structural principal-agent model with renegotiation on a set of urban transport service contracts. The model captures two important features of the industry. First, only two types of contracts are used in practice (fixed-price and cost-plus). Second, subsidies increase over time. We compare a scenario with renegotiation and a hypothetical situation with full commitment. We conclude that the welfare gains from improving commitment would be significant but would accrue mostly to operators.

JEL codes

  • L11: Production, Pricing, and Market Structure • Size Distribution of Firms
  • L13: Oligopoly and Other Imperfect Markets
  • L41: Monopolization • Horizontal Anticompetitive Practices
  • L92: Railroads and Other Surface Transportation

Reference

Marc Ivaldi, and Gerard J. Mccullough, Welfare Tradeoffs in U.S. Rail Mergers, TSE Working Paper, n. 10-196, September 8, 2010.

See also

Published in

TSE Working Paper, n. 10-196, September 8, 2010