Absorptive capacity, knowledge spillovers and incentive contracts

Abstract

We attempt to identify and measure knowledge spillovers in the French urban transport sector, which is strongly regulated and where a few large industrial groups are in charge of operating several urban networks. We build and estimate a structural cost model where the service is regulated by a local government and is provided by a single operator. Knowledge spillovers are directly linked to the know-how of a specific group, but they also depend on the incentive power of the regulatory contract which shapes the effort of the local managers. Exerting an effort in a specific network allows a cost reduction in this network, but it also benefits other networks that are members of the same group. We find that diversity of knowledge across operators of the same group improves absorptive capacity and increases the flow of spillovers. Simulation exercises provide evidence of significant reductions in total operating costs following the enlargement of industrial groups.