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



Table 1. Estimation results, sectoral investment data

with country and industry fixed effects________

OLS

Bayesian model averaging

Coefficient

p-value

posterior

posterior mean

posterior standard

inclusion

conditional on

error conditional on

probability

__________inclusion______

_________inclusion_______

Lagged investment

0.865

0.000

1.000

0.880

0.166

Real interest rate

0.009

0.130

0.654

0.006

0.003

Barriers to entry

-0.046

0.008

0.998

-0.043

0.012

Public ownership

0.004

0.701

0.151

0.000

0.002

Regulatory independence

-0.026

0.556

0.184

-0.004

0.006

Incentive regulation

-0.003

0.866

0.141

0.000

0.002

No price regulation
Independence and incentive
regulation

-0.016

0.133

0.975

-0.015

0.008

interaction term_______________

0.060

0.002

0.996

___________0.053________

________0.014__________

Adj. R-squared

Regressions run

0.741

256

Prior inclusion probability

0.5

Note: posterior inclusion probability measures the extent to which any given model contributes to explaining the dependent variable as
compared to the other models. Bold figures for the posterior inclusion probability indicate that it is higher than the prior inclusion
probability of 0.5. The posterior mean conditional on inclusion is the mean of the individual OLS estimates weighted by the posterior
inclusion probability of the individual models including a given variable.

7. Concluding remarks

This paper studied the impact of the regulatory setup on sectoral investment in network industries.
Earlier empirical literature suggested that shifting away from traditional rate-of-return regulation
did not generally cause under-investment in network industries. For instance, overall investment
in the UK railway sector did increase in the aftermath of privatisation and the introduction of
incentive regulation. Empirical studies also highlighted that incentive regulation was very helpful
in promoting the deployment of new technologies in the US telecommunications sectors in the
late 1980s and early 1990s.

The empirical results in this paper based on cross-section OLS regressions and on Bayesian
model averaging suggest that the introduction of incentive price regulation or the establishment of
an independent sector regulator do not have a positive influence on investment by themselves.
However, once these policies are implemented jointly, they are associated with a significant
increase in investment. This result highlights the importance of the overall coherence of the
general regulatory environment in supporting investment incentives. Furthermore, the empirical
results show that lower entry barriers encourage investment in the network industries.

18



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