Investment incentives and airport regulation

Arguments for and against the proposition that price-capped privatised utilities have an incentive to under-invest are examined in the context of airport regulation. The general proposition finds support from generic arguments associated with the hold-up problem and with ex-post opportunism. Three counter arguments are then considered: that under-investment imposes additional internal costs on the firm; that the regulated firm can consume its monopoly rent by expanding its asset base; and that it can leverage its market power through seeking excessive investment. Consideration is then given to the empirical evidence focusing on price-capped airports in the UK and Ireland. It is concluded that, on balance, it is probable that the regulated airport companies have inclined towards over-investment. 2006 Elsevier Ltd. All rights reserved.