Working Paper: CEPR ID: DP7296
Authors: Emmanuelle Auriol; Sara Biancini
Abstract: The paper studies the impact of market integration on investment incentives in non-competitive industries. It distinguishes between investment in transportation and production cost-reducing technologies. Each domestic firm is controlled by a national regulator in a common market made of two countries. When public funds are costly, and production costs in the two countries are not very different, business stealing effect decreases welfare in both countries. Welfare increases in both countries when the difference in production costs is large enough. Market integration tends to increase the level of sustainable investment in cost-reducing technology compared to autarky. This is in contrast with the systematic underinvestment problem arising for transportation facilities. Free-riding reduces the incentives to invest in these public-good components, while business-stealing reduces the capacity for financing new investment.
Keywords: Competition; Investment; Market Integration; Regulation
JEL Codes: F12; F15; L43; L51; R53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market integration (F02) | sustainable investment in cost-reducing technology (Q55) |
| sustainable investment in cost-reducing technology (Q55) | welfare (I38) |
| market integration (F02) | underinvestment in transportation facilities (R42) |
| underinvestment in transportation facilities (R42) | welfare (I38) |