The economics of regional railway regulation under vertical separation

We provide a model of local railway passengers service able to account for the main specific characteristics of the sector under vertical separation. Afterwards, we use this model to carry out both a normative analysis of the operators’ investment decisions and an assessment of the welfare effects of simple regulatory instruments. We show that, because of the information asymmetry of train operating company about the productivity of the infrastructure manager, the introduction of a regulatory instrument inducing the former to internalize the effect of her investment on the latter’s cost of providing access may be welfare reducing.