Strategic Choice of Financing Systems in Regulated and Interconnected Industries

The growing importance of inter-network exchanges in infrastructure-based utilities influences regulatory choices and access pricing for downstream services using the networks. We analyze this problem in a setting where the infrastructure managers of two bordering countries are in charge of pricing the access to their networks for downstream transport firms that provide international services. Network costs can be financed through public funds and user charges. In this context, access prices are affected by the incomplete internalization of consumers' surplus and infrastructure costs; we analyze how this distortion at the access pricing level generates a distortion in the levels of public funds dedicated to infrastructure financing. Because of these distortions, it turns out that in a non-cooperative setting the second-best outcome might consist in the simultaneous adoption of a no-subsidy system. However, multiple equilibria typically exist and the second-best outcome is never a stable equilibrium. Other properties of the different possible equilibria are studied, as well as the impact of supra-national policies aimed at encouraging the development of international services. Finally, we show that the coordination problems deriving from the existence of multiple equilibria can, sometimes, be solved by separating the choice of a regulatory mode from the access pricing stage, thereby allowing the infrastructure managers to commit to use a specific financing system before setting the access price.

BASSANINI, A. and POUYET, J. (2005). Strategic Choice of Financing Systems in Regulated and Interconnected Industries. Journal of Public Economics, 89(43892), pp. 233-259.

Keywords : #Interconnected-networks, #Infrastructure-financing, #Ramsey-pricing