Wednesday, May 11, 2011
Posted by D. Daniel Sokol
Bastian Henze, Tilburg University - Department of Economics - CentER & TILEC, Charles N. Noussair, Tilburg University, and Bert Willems, Tilburg University - Department of Economics - CentER & TILEC discuss Regulation of Network Infrastructure Investments: An Experimental Evaluation.
ABSTRACT: This paper reports the results of an experiment evaluating three regulatory schemes for network infrastructure, in terms of their ability to generate efficient levels of capacity investment. We compare the performance of (1) price cap regulation, (2) a regulatory holiday for new capacity, and (3) price cap regulation with long term contracts combined with a secondary market. We find that the price cap regulation outperforms the regulatory holiday as the latter creates an incentive to underinvest relative to optimal levels. Long term contracts also fail to improve on single price-cap regulation, and can provide more noisy signals about future demand and thus reduce investment.