Investment, reprocurement and franchise contract length in the British railway industy

Affuso, L and Newbury, D (2002) Investment, reprocurement and franchise contract length in the British railway industy. Working Paper. London Business School Regulation Initiative Working Paper Series.

Abstract

This paper investigates the effects of contractual arrangements of firms operating in a regulated environment on their investment behaviour. It studies interaction between repeated auctions of rail franchise of different lengths, uncertaintly and incentives for investments in rolling stock, following the privatisation of British Rail. Theoretical predictions are tested empirically using a unique panel of data. Theory suggests that short franchise lengths reduce incentives to invest in specfic assets. Our empirical results that suggest that competition and strategic behaviour at the reprocurement stage can create incentives for delayed investment. Investing just before the end of the frachise enhances the incumbent's probability of having the contract re awarded the provides it with a firstmover advantage, while raising the entry cost for other potential bidders.