Knowledge Spillovers in Cost-Reduction Incentives

The goal of this paper is to identify and measure the relevance of knowledge spillovers in the French urban transport industry, where most regulated transportation networks are operated by firms that belong to the same company. We build and estimate a structural cost regulation model under incomplete information where the service is regulated by an authority and is provided by a single operator that may be owned by a larger company. We identify the knowledge spillovers which arise for some operators being linked to a same group, and see how they influence the firms’ decisions of exerting effort in order to reduce their operating costs. Our model provides us with estimates of the operators’ inefficiencies, the effort of the managers and the knowledge spillovers. Our results show that knowledge spillovers are indeed relevant for the existing industrial groups present in the French urban transport industry. Simulation exercises provide evidence of significant reductions in total operating cost following the enlargement of industrial groups and/or mergers between existing groups