IDEAS home Printed from https://ideas.repec.org/a/bla/coecpo/v9y1991i2p101-114.html
   My bibliography  Save this article

Crossing Dupuit'S Bridge Again: A Trigger Policy For Efficient Investment In Infrastructure

Author

Listed:
  • DAVID J. SALANT
  • GLENN A. WOROCH

Abstract

This paper borrows Dupuit's parable of a bridge so as to reexamine the problem of selecting and financing public investment projects in a dynamic and strategic setting. A regulator imposes a price ceiling, and a firm makes a sunk investment each period. Three simple examples reveal the connection between the non‐cooperative equilibrium of this relationship and the second‐best optimum. One cannot implement this “planning solution” generally since the firm and the regulator each behaves opportunistically toward the other's irreversible actions. The facility never will be built if investment in it is infinitely lumpy and if the facility is perfectly durable. Departing from this extreme case, however, one can restore proper incentives by adopting “trigger policies.” The regulator responds to a deviation from a candidate path by cutting price down to operating cost, and the firm halts all investment. If capital does not depreciate too slowly and the future is not discounted too much, then one can approximate the planning solution by an equilibrium. The success of trigger policies suggests that reformers should relax many regulatory rules and procedures to support efficient investment in infrastructure.

Suggested Citation

  • David J. Salant & Glenn A. Woroch, 1991. "Crossing Dupuit'S Bridge Again: A Trigger Policy For Efficient Investment In Infrastructure," Contemporary Economic Policy, Western Economic Association International, vol. 9(2), pages 101-114, April.
    • Handle: RePEc:bla:coecpo:v:9:y:1991:i:2:p:101-114
    DOI: 10.1111/j.1465-7287.1991.tb00335.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1465-7287.1991.tb00335.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1465-7287.1991.tb00335.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
    2. David J. Salant & Glenn A. Woroch, 1992. "Trigger Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 29-51, Spring.
    3. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    4. Brock, W A & Dechert, W D, 1985. "Dynamic Ramsey Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 569-591, October.
    5. Robert B. Ekelund, 1970. "Price Discrimination and Product Differentiation in Economic Theory: An Early Analysis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(2), pages 268-278.
    6. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
    7. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    8. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    9. Victor P. Goldberg, 1976. "Regulation and Administered Contracts," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 426-448, Autumn.
    10. Boiteux, M., 1971. "On the management of public monopolies subject to budgetary constraints," Journal of Economic Theory, Elsevier, vol. 3(3), pages 219-240, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:diw:diwwpp:dp1710 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bickenbach, Frank, 1999. "Regulierung und Wettbewerb im Bereich der Netzinfrastrukturen: Begründung, Regeln und Institutionen," Kiel Working Papers 910, Kiel Institute for the World Economy (IfW Kiel).
    2. Bengtsson, Niklas, 2015. "Efficient informal trade: Theory and experimental evidence from the Cape Town taxi market," Journal of Development Economics, Elsevier, vol. 115(C), pages 85-98.
    3. Jean-Jacques Laffont & Jean Tirole, 1988. "Repeated Auctions of Incentive Contracts, Investment, and Bidding Parity with an Application to Takeovers," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 516-537, Winter.
    4. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    5. Surajeet Chakravarty & Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section..
    6. Surajeet Chakravarty & W. Bentley MacLeod, 2004. "On the Efficiency of Standard Contracts the Case of Construction," Working Papers 874, Princeton University, Department of Economics, Industrial Relations Section..
    7. Surajeet Chakravarty & W. Bentley MacLeod, 2006. "Construction Contracts (or “How to Get the Right Building at the Right Price?”)," CESifo Working Paper Series 1714, CESifo.
    8. Hsuan-Yu Lin & Chih-Hai Yang, 2016. "Uncertainty, specific investment, and contract duration: evidence from the MLB player market," Empirical Economics, Springer, vol. 50(3), pages 1009-1028, May.
    9. Cesi Berardino & Iozzi Alberto & Valentini Edilio, 2012. "Regulating Unverifiable Quality by Fixed-Price Contracts," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-39, September.
    10. José Holguín-Veras & Sergio Jara-Díaz, 2010. "Optimal Two-Part Pricing and Capacity Allocation with Multiple User Classes and Elastic Arrivals at Constrained Transportation Facilities," Networks and Spatial Economics, Springer, vol. 10(4), pages 427-454, December.
    11. Stefan Buehler & Dennis L. Gärtner, 2013. "Making Sense of Nonbinding Retail-Price Recommendations," American Economic Review, American Economic Association, vol. 103(1), pages 335-359, February.
    12. Anderson, Ronald W. & Nyborg, Kjell G., 2011. "Financing and corporate growth under repeated moral hazard," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 1-24, January.
    13. Gersbach, Hans & Glazer, Amihai, 1999. "Markets and Regulatory Hold-Up Problems," Journal of Environmental Economics and Management, Elsevier, vol. 37(2), pages 151-164, March.
    14. Roland Strausz, 2009. "Regulatory Risk under Optimal Incentive Regulation," CESifo Working Paper Series 2638, CESifo.
    15. Adler, Nicole & Forsyth, Peter & Mueller, Juergen & Niemeier, Hans-Martin, 2015. "An economic assessment of airport incentive regulation," Transport Policy, Elsevier, vol. 41(C), pages 5-15.
    16. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
    17. Kosnik, Lea & Lange, Ian, 2011. "Contract renegotiation and rent re-distribution: Who gets raked over the coals?," Journal of Environmental Economics and Management, Elsevier, vol. 62(2), pages 155-165, September.
    18. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    19. William P. Rogerson, 1988. "Profit Regulation of Defense Contractors and Prizes for Innovation : Theory and Evidence," Discussion Papers 759, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    20. Tomoeda, Kentaro, 2019. "Efficient investments in the implementation problem," Journal of Economic Theory, Elsevier, vol. 182(C), pages 247-278.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:coecpo:v:9:y:1991:i:2:p:101-114. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/weaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.