Location of Repository

Infrastructure Investment in Network Industries: The Role of Incentive Regulation and Regulatory Independence

By Balazs Egert


This paper finds that coherent regulatory policies can boost investment in network industries of OECD economies. Rate-of-return regulation is generally thought to result in overinvestment, while incentive regulation is believed to entail underinvestment. Yet, previous empirical work has generally found that the introduction of incentive regulation has not systematically changed investment in network industries. According to the theoretical literature, regulatory uncertainty exposes both types of regimes to the danger of underinvestment. However, regulatory uncertainty is arguably higher under rate-of-return regulation because investment decisions (what can be included in the rate base) are usually evaluated in a discretionary manner, while firms operating under incentive regulation are less affected by this behaviour. In addition, incentive regulation encourages investment in cost-reducing technologies. Using Bayesian model averaging techniques, this paper shows that incentive regulation implemented jointly with an independent sector regulator (indicating lower regulatory uncertainty) has a strong positive impact on investment in network industries. In addition, lower barriers to entry are also found to encourage sectoral investment. These results support the importance of implementing policies in a coherent framework.network industries, regulation, incentive regulation, price cap, cost-plus regulation, rate-of-return regulation, regulatory independence, investment

OAI identifier:

Suggested articles



  1. (2009). A Parametric Analysis of Prospect Theory’s Functionals for the General Population,
  2. (2009). Acting Autonomously or Mimicking the State and Peers? A Panel Tobit Analysis of Financial Dependence and Aid Allocation by Swiss NGOs,
  3. (2009). An Empirical Analysis of the Dynamics of the Welfare State: The Case of Benefit Morale,
  4. (2009). Are Risk Aversion and Impatience Related to Cognitive Ability?,
  5. (2009). Assets Returns Volatility and Investment Horizon: The French Case,
  6. (2009). Asymmetric Information and Overinvestment in Quality,
  7. (2009). Asymmetric Information Renders Minimum Wages Less Harmful,
  8. (2009). Bank of England Interest Rate Announcements and the Foreign Exchange Market,
  9. (2009). Bootstrap Panel Granger-Causality between Government Budget and External Deficits for the EU,
  10. (2009). Borders and Distance in Knowledge Spillovers: Dying over Time or Dying with Age? – Evidence from Patent Citations,
  11. (2009). Can Profit Sharing Lower Flexible Outsourcing? A Note,
  12. (2009). China’s Current Account and Exchange Rate,
  13. (2009). Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness,
  14. Dissatisfied with Life, but Having a Good Day: Time-Use and Well-Being of the Unemployed,
  15. (2009). Economic, Political and Institutional Determinants of Budget Deficits in the European Union,
  16. (2009). Economists in the PITS?,
  17. (2005). Electricity Market Reform in the European Union: Review of Progress Toward Liberalization & Integration”, Center for Energy and Environmental Policy Research Working
  18. (2009). Elke Renner and Martin Sefton, Sequential versus Simultaneous Contributions to Public Goods: Experimental Evidence,
  19. (2009). Endogenous Systemic Liquidity Risk,
  20. (2009). EU-Type Carbon Emissions Trade and the Distributional Impact of Overlapping Emissions Taxes,
  21. (2009). Exchange Rate Forecasters’ Performance: Evidence of Skill?,
  22. (2009). Female Labor Supply and Parental Leave Benefits – The Causal Effect of Paying Higher Transfers for a Shorter Period of Time,
  23. (2009). Fiscal Rules and the Opportunistic Behaviour of the Incumbent Politician: Evidence from Italian Municipalities,
  24. (2009). Frédéric Docquier and Çağlar Özden,
  25. (2009). Guglielmo Maria Caporale, Nikolaos Kourogenis and Nikitas Pittis, Selectivity, Market Timing and the Morningstar Star-Rating System,
  26. (2009). How “Chicagoan” are Gary Becker’s Economic Models of Marriage?,
  27. (2009). How to Avoid a Pension Crisis: A Question of Intelligent System Design,
  28. (2009). Hyun-Ju Koh and Michael Pflüger, Inefficient Lock-in and Subsidy Competition,
  29. Indirect Taxation in Vertical Oligopoly,
  30. (2009). Infrastructure Investment in Network Industries: The Role of Incentive Regulation and Regulatory Independence,
  31. Infrastructure Regulation and Investment for the Long-Term – An Introduction”,
  32. (2009). International Antitrust Enforcement and Multi-Market Contact,
  33. (2009). International Trade and Retailing,
  34. (2009). International Trade Integration: A Disaggregated Approach,
  35. (2000). Investment, Re-Procurement and Franchise Contract Length in the British Railway Industry”,
  36. (2009). Is Social Security Part of the Social Safety Net?,
  37. (2009). Is Traditional Teaching really all that Bad? A Within-Student Between-Subject Approach,
  38. (2009). Luigi Siciliani and Odd Rune Straume, Hospital Competition and Quality with Regulated Prices,
  39. (2009). Malte Heyne and Wolfgang Maennig, Induced Civic Pride and Integration,
  40. (2009). Marko Koethenbuerger and Guttorm Schjelderup, Should UtilityReducing Media Advertising be Taxed?,
  41. (2009). Moderating Political Extremism: Single Round vs Runoff Elections under Plurality Rule,
  42. (2009). Multi-Market Collusion with Demand Linkages and Antitrust Enforcement,
  43. (2009). Nicolò and Iryna Ivaschenko, Global Liquidity, Risk Premiums and Growth Opportunities,
  44. (2009). On the Equivalence between Labor and Consumption Taxation,
  45. (2009). Optimal Education Policies and Comparative Advantage,
  46. Panel Regression with Random Noise,
  47. (2009). Pierre Pestieau and Gregory Ponthiere, Should we Subsidize Longevity?,
  48. (2009). Rating Assignments: Lessons from International Banks,
  49. (2009). Real Estate Prices and the Importance of Bequest Taxation,
  50. (2009). Reference Points and Effort Provision,
  51. (2009). Regulatory Risk under Optimal Incentive Regulation,
  52. (2009). Revenue Forecasting Practices: Differences across Countries and Consequences for Forecasting Performance,
  53. (2009). Smoking Today and Stopping Tomorrow: A Limited Foresight Perspective,
  54. (2009). Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany,
  55. (2009). Taxes and Pensions,
  56. (2009). Taxing Education in Ramsey’s Tradition,
  57. (2009). Term Structure and Cyclicity of Value-at-Risk: Consequences for the Solvency Capital Requirement,
  58. (2009). The Empirics of China’s Outward Direct Investment,
  59. The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa,
  60. (2009). The Open Method of Coordination (OMC) as an Evolutionary Learning Process,
  61. (1971). The Rise in Female Employment and the Role of Tax Incentives – An Empirical Analysis of the Swedish Individual Tax Reform of
  62. (2009). The Role of the Log Transformation in Forecasting Economic Variables,
  63. (2009). The Taxation of Passive Foreign Investment – Lessons from German Experience,
  64. (2009). The Volatility Curse: Revisiting the Paradox of Plenty,
  65. (2009). Trends in Monetary Policy Transparency,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.