Specific Investments and Ownership Structures in Railways – An Experimental Analysis

We analyze the impact of different organizational structures on incentives to invest in railways: vertical integration, vertical separation, and a hybrid form. Economic theory predicts that vertical integration fosters socially optimal investment, whereas, due to potential hold-up problems, both vertical separation and hybrid forms cause severe underinvestment. We test these theoretical predictions in a laboratory experiment and find evidence that, in a vertically integrated environment, the level of investment in rolling stock and in rail infrastructure is roughly socially optimal. The complete absence of a discrepancy in our experimental results between vertical separation and the hybrid organisational structure, contradicting the predictions of model-theory, is surprising and can be attributed to the relatively high investments in the separated model. This contradiction might also be explained by the existence of social preferences.