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Yardstick Competition and Investment Incentives
Author(s) -
Dalen Dag Morten
Publication year - 1998
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.1998.00105.x
Subject(s) - yardstick , incentive , competition (biology) , investment (military) , commit , ex ante , economics , microeconomics , business , industrial organization , macroeconomics , law , ecology , geometry , mathematics , database , politics , political science , computer science , biology
This paper analyzes how firms' investment incentives are affected by yardstick competition in a situation in which the regulator is unable to commit himself to the regulatory contract before firms invest. Despite its rent‐extracting property, yardstick competition does not necessarily reduce efficiency‐improving investment. Considering firm‐specific investment, yardstick competition is shown to increase investment incentives over individual regulation affirms. In this case, therefore, yardstick competition both reduces the regulator's informational problem ex post and strengthens the firms' investment incentives ex ante. If instead investment is industry‐specific, incentives to invest are lowered by yardstick competition.