Regulatory Independence, Investment and Political Interference: Evidence from the European Union

This paper analyses and empirically investigates the impact of "modern" regulatory governance - i.e. the inception of Independent Regulatory Agencies (IRAs) - on the investment decisions of a large sample of European publicly traded regulated firms from 1994 to 2004. Because these firms provide essential services, governments are highly sensitive to regulatory decisions and outcomes. We therefore also investigate the impact of governments' political influence, controlling for residual state ownership and market liberalization. To account for potential endogeneity of the key institutional variables, we draw our identification strategy from the political economy literature. Our results show that regulatory independence has a positive impact on firm investment. We also find that government interference generates instability and uncertainty in the regulatory framework, thus undermining investment incentive

Access Regulation, Financial Structure and Investment in Vertically Integrated Utilities: Evidence from EU Telecoms

We examine theoretically and empirically the relationship between access regulation, financial structure and investment decisions in network industries, analyzing if financial variables can be used as a strategic device to influence the regulator's price setting decisions. Using a panel of 15 EU Public Telecommunication Operators (PTOs) over the period 1994-2005, we first investigate the determinants of financial leverage and investment, and then test the relationship between leverage, regulated (wholesale and retail) charges and investment. Moreover, our model suggests that if leverage influences the regulated access charges, then it will also impact competition in the downstream segment. Therefore, we also investigate the impact of the PTO's leverage on market competition. The results show that leverage positively affects regulated rates, as well as the PTOs' investment rate, as predicted by Spiegel and Spulber (1994). Moreover, higher leverage also leads to higher access charges and an increase in leverage is followed by a decrease in the number of competitors and by an increase of the incumbent's market share. This suggests that the strategic use of debt to discipline the regulator's lack of commitment within a vertically integrated network industry may somewhat impair or delay competition in the retail segment, but has a favorable counterpart in mitigating the underinvestment proble

Regulatory Independence, Investment and Political Interference: Evidence from the European Union

This paper analyses and empirically investigates the impact of “modern” regulatory governance - i.e. the inception of Independent Regulatory Agencies (IRAs) - on the investment decisions of a large sample of European publicly traded regulated firms from 1994 to 2004. Because these firms provide essential services, governments are highly sensitive to regulatory decisions and outcomes. We therefore also investigate the impact of governments’ political influence, controlling for residual state ownership and market liberalization. To account for potential endogeneity of the key institutional variables, we draw our identification strategy from the political economy literature. Our results show that regulatory independence has a positive impact on firm investment. We also find that government interference generates instability and uncertainty in the regulatory framework, thus undermining investment incentives

Artificial intelligence, firms and consumer behavior: A survey

The current advances in Artificial Intelligence (AI) are likely to have profound economic implications and bring about new trade-offs, thereby posing new challenges from a policymaking point of view. What is the impact of these technologies on the labor market and firms? Will algorithms reduce consumers' biases or will they rather originate new ones? How competition will be affected by AI-powered agents? This study is a first attempt to survey the growing literature on the multi-faceted economic effects of the recent technological advances in AI that involve machine learning applications. We first review research on the implications of AI on firms, focusing on its impact on labor market, productivity, skill composition and innovation. Then we examine how AI contributes to shaping consumer behavior and market competition. We conclude by discussing how public policies can deal with the radical changes that AI is already producing and is going to generate in the future for firms and consumers

Speeding Up the Internet: Regulation and Investment in the European Fiber Optic Infrastructure

In this paper, we study how the coexistence of access regulations for legacy (copper) and fiber networks shapes the incentives to invest in fiber-based network infrastructures. To this end, we first develop a theoretical model that extends the existing literature by, among other things, considering alternative firms with proprietary legacy network (e.g., cable operators) and the presence of asymmetric mandated access to networks. In the empirical part, we test the theoretical predictions using a novel panel data from 27 EU member states pertaining to the last decade. Our main finding is that, in line with the theoretical results, stricter access regulations (i.e., a decrease in access price to legacy network and the adoption of fiber regulation) decrease the incumbent operators' fiber investments. The estimated magnitude of these effects is economically significant. On the other hand, cable operators, who are responsible for the largest share of investments in fiber, are not affected by access regulation. Our paper thus provides policy insights for the on-going revision of the EU regulation framework for the electronic communications industry

Access Pricing, Competition, and Incentives to Migrate From“Old” to “New” Technology - Harvard Kennedy School of Government RWP11-029

In this paper, we analyze the incentives of an incumbent and an entrant to migrate from an “old” technology to a “new” technology, and discuss how the terms of wholesale access affect this migration. We show that a higher access charge on the legacy network pushes the entrant firm to invest more, but has an ambiguous effect on the incumbent’s investments, due to two conflicting effects: the wholesale revenue effect, and the business migration effect. If both the old and the new infrastructures are subject to ex-ante access regulation, we also find that the two access charges are positively correlated

Access regulation and the transition from copper to fiber networks in telecoms

In this paper we study the impact of different forms of access obligations on firms’ incentives to migrate from the legacy copper network to ultra-fast broadband infrastructures. We analyze three different kinds of regulatory interventions: geographical regulation of access to copper networks–where access prices are differentiated depending on whether or not an alternative fiber network has been deployed; access obligations on fiber networks and its interplay with wholesale copper prices; and, finally, a mandatory switch-off of the legacy copper network–to foster the transition to the higher quality fiber networks. Trading-off the different static and dynamic goals, the paper provides guidelines and suggestions for policy makers’ decisions

Setting network tariffs with heterogeneous firms: The case of natural gas distribution

The appropriate treatment of firm heterogeneity plays a crucial role in the application of benchmarking analyses for regulatory purposes. Within the realm of two-step approaches, this paper challenges the widespread adoption of single-variable clustering: heterogeneity has often multiple sources, which calls for more sophisticated clustering methodologies. In fact, reliable cluster-specific rankings provide firms’ management with more realistic objectives as well as freedom to identify the appropriate strategies to improve efficiency. In order to provide regulatory guidance on this issue, we use a unique dataset of detailed accounting data and unbundled network-related costs for a panel of Italian gas distributors and we test two alternative methods: a hybrid clustering procedure (HCP) and a latent class model (LCM). Our results show that HCP and LCM perform better than size segmentation in the identification of classes, thereby leading to more reliable production frontiers, but do not support a conclusive preference for one or the other method. While both methods are sensitive to outliers, LCMs seem to provide deeper insights on the drivers of firm inefficiency. However, they also present stationarity and convergence issues, which might favour the implementation of HCP methods. Furthermore, the degree of discretionary judgement in the modelling decisions (e.g., model specification and choice of the partition) is slightly higher with LCMs than with HCP. In this respect, the HCP, with its lower modelling and analytical complexity, may feature as a more appealing option, facilitating the interactions between regulator and firm managers

Optimal pricing and promotional effort control policies for a new product growth in segmented market

Market segmentation enables the marketers to understand and serve the customers more effectively thereby improving company’s competitive position. In this paper, we study the impact of price and promotion efforts on evolution of sales intensity in segmented market to obtain the optimal price and promotion effort policies. Evolution of sales rate for each segment is developed under the assumption that marketer may choose both differentiated as well as mass market promotion effort to influence the uncaptured market potential. An optimal control model is formulated and a solution method using Maximum Principle has been discussed. The model is extended to incorporate budget constraint. Model applicability is illustrated by a numerical example. Since the discrete time data is available, the formulated model is discretized. For solving the discrete model, differential evolution algorithm is used