Digitized by the Internet Archive in 2011 with Funding from Working Paper Department of Economics Price Distortions, Financing Constraints and Second-best Investment Rules in the Transportation Industries*

This paper analyzes the second-best pricing and investment rules to be followed in the transportation industries in the presence of intermodal competition, exogenous price distortions, and financing constraints, using both theoretical and simulation analysis. It shows that price distortions and financing constraints in one mode will not only affect the investment rules in that mode, but will also affect the pricing rules and investment decisions in all other modes. While the theoretical discussion indicates that the secondbest pricing and investment rules are quite complex, the simulation analysis indicates that the benefit function is relatively flat, suggesting that the costs of using simpler first-best rules may be relatively small.