Regulation Of Network Infrastructure Investments An Experimental Evaluation
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. The authors compare the performance of price cap regulation, a regulatory holiday for new capacity, and price cap regulation with long term contracts combined with a secondary market. They 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.