Regulation of Network Infrastructure Investments: An Experimental Evaluation
CentER Discussion Paper No. 2011-035
38 Pages Posted: 25 Mar 2011 Last revised: 31 Mar 2011
Date Written: March 21, 2011
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.
Keywords: Infrastructure Investment, Experiment, Price Cap, Regulatory Holiday
JEL Classification: C9, L51, L95
Suggested Citation: Suggested Citation