Investment, Re-Procurement & Franchise Contract Length in the British Industry

Affuso, Luisa; Newbery, David M. G.

doi:10.2139/ssrn.371640

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Investment, Re-Procurement & Franchise Contract Length in the British Industry

Regulation Initiative Working Paper No. 50

32 Pages Posted: 10 Apr 2003

See all articles by Luisa Affuso

Luisa Affuso

Marsh & McLennan Companies - Cambridge Office; London Business School - Department of Economics

David M. G. Newbery

University of Cambridge - Department of Applied Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 2002

Abstract

This paper investigates the effects of contractual arrangements of firms operating in a regulated environment on their investment behaviour. It studies the interaction between repeated auctions of rail franchises of different lengths, uncertainty and incentives for investment in rolling stock, following the privatisation of British Rail. Theoretical predications are tested empirically using a unique panel of data. Theory suggests that short franchise reduce incentives to invest in specific assests. 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 uncumbent's probability of having the contract re-awarded and provides it with a first-mover advantage, while raising the entry costs for other potential bidders.

Keywords: Railways, Investment, Contracts, Panel Data

JEL Classification: L22, L92, D23, C23

Suggested Citation: Suggested Citation

Affuso, Luisa and Newbery, David M. G., Investment, Re-Procurement & Franchise Contract Length in the British Industry (March 2002). Regulation Initiative Working Paper No. 50, Available at SSRN: https://ssrn.com/abstract=371640 or http://dx.doi.org/10.2139/ssrn.371640