We investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors. Regulatory risk reflects uncertainty about the regulator’s commitment to a regulatory policy that promotes the regulated firm’s noncontractible investment. We show that, when the regulator sets the regulatory policy after the vertical industry structure has been established, some degree of regulatory risk is ex ante socially beneficial. Regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost. This occurs for moderate costs of high investment and firms’ small risk aversion. Our analysis sheds new light on some relevant empirical patterns in vertically related markets.

(2020). Regulatory risk, vertical integration, and upstream investment [journal article - articolo]. In EUROPEAN ECONOMIC REVIEW. Retrieved from http://hdl.handle.net/10446/168958

Regulatory risk, vertical integration, and upstream investment

Fiocco, Raffaele;
2020-01-01

Abstract

We investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors. Regulatory risk reflects uncertainty about the regulator’s commitment to a regulatory policy that promotes the regulated firm’s noncontractible investment. We show that, when the regulator sets the regulatory policy after the vertical industry structure has been established, some degree of regulatory risk is ex ante socially beneficial. Regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost. This occurs for moderate costs of high investment and firms’ small risk aversion. Our analysis sheds new light on some relevant empirical patterns in vertically related markets.
articolo
Fiocco, Raffaele; Guo, Dongyu
(2020). Regulatory risk, vertical integration, and upstream investment [journal article - articolo]. In EUROPEAN ECONOMIC REVIEW. Retrieved from http://hdl.handle.net/10446/168958
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10446/168958
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