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Access Regulation and the Timing of Infrastructure Investment
Author(s) -
GANS JOSHUA S.,
WILLIAMS PHILIP L.
Publication year - 1999
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.1999.tb02441.x
Subject(s) - incentive , sunk costs , investment (military) , negotiation , valuation (finance) , microeconomics , business , ex ante , economics , finance , industrial organization , politics , political science , law , macroeconomics
This paper examines infrastructure investment incentives under a system of ‘regulation by negotiation’. We demonstrate that an appropriately specified access pricing rule can induce private firms to choose to invest at a socially optimal time. The optimal regulatory regime allocates investment costs to the access provider and seeker based on their relative use‐values of the facility. It is superior to an unregulated environment because it commits firms ex ante to an access charge that allows for sunk cost recovery. In addition, we show that when the time that access is sought is flexible both replacement‐ and historical‐cost asset valuation methodologies can lead to optimal investment incentives. However, when seeker timing is restricted, historical cost can give rise to distorted incentives.