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- Title
Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk.
- Authors
Hausman, Jerry; Myers, Stewart
- Abstract
The Surface Transportation Board (STB) applies the theory of contestable markets to regulate dominant railroad freight movements. The STB bases its determination whether railroad revenues are excessive if they would be more than sufficient to support investment in a hypothetical stand-alone railroad designed to handle the at-issue traffic efficiently. The STB regulatory approach does not take correct account of the importance of sunk costs and irreversible investments in the railroad industry. We estimate how large the mistakes can be by applying a real options approach that takes into account the effect of sunk costs, irreversible investment, and asymmetric returns.
- Subjects
UNITED States; RAILROADS; SUNK costs; INDUSTRIAL costs; RISK; UNITED States. Surface Transportation Board
- Publication
Journal of Regulatory Economics, 2002, Vol 22, Issue 3, p287
- ISSN
0922-680X
- Publication type
Article
- DOI
10.1023/A:1020822228646