Infrastructure quality regulation

Infrastructure quality is crucial to achieve an efficient transportation network. This paper considers the regulation of infrastructure quality when the impact of investments on demand is private information. The choice of vertical structure has an impact on the information rent, and it is shown that the value of the firm's private information is reduced under vertical separation. In determining the optimal quality, there is a trade-off between information rent and internalization of the vertical externality. Hence, both the magnitude of the infrastructure charge and the decision on the vertical structure are crucial factors.

► We study the (partially) optimal regulation of quality when demand is unknown to the regulator. ► We show that the choice of vertical structure have an impact on the information rent. ► A high infrastructure charge should be accompanied by vertical integration. ► A large demand shifting effect of quality may warrant a particular focus on quality regulation.