Investment, Re-Procurement & Franchise Contract Length in the British Industry

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