Journal of Regulatory Economics

, Volume 44, Issue 3, pp 287–307 | Cite as

Investment coordination in network industries: the case of electricity grid and electricity generation

  • Felix HöfflerEmail author
  • Achim Wambach
Original Article


Liberalization of network industries frequently separates the network from the other parts of the industry. This is important in particular for the electricity industry where private firms invest into generation facilities, while network investments usually are controlled by regulators. We discuss two regulatory regimes. First, the regulator can only decide on the network extension. Second, she can additionally use a “capacity market” with payments contingent on private generation investment. For the first case, we find that even absent asymmetric information, a lack of regulatory commitment can cause inefficiently high or inefficiently low investments. For the second case, we develop a standard handicap auction which implements the first best under asymmetric information if there are no shadow costs of public funds. With shadow costs, no simple mechanism can implement the second best outcome.


Regulation Commitment Capacity markets  Transmission system investment 

JEL Classification

D44 D47 K23 L51 L94 



We would like to thank the editor and two anonymous referees for helpful comments and suggestions.


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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of Economics, Institute of Energy Economics (EWI)University of CologneCologneGermany
  2. 2.Max Planck Institute for Research on Collective GoodsBonnGermany
  3. 3.Department of EconomicsUniversity of CologneCologneGermany

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