Vertical Integration in Rail Transportation: Private and Public Incentives

Abstract

This article investigates the incentives to unbundle operations and infrastructure in the railway industry in a two-country model from the viewpoint of national governments. The analysis shows that the decision to unbundle institutionally or organizationally with separated accounts depends crucially on the importance of cross-border transportation. If cross-border transportation is sufficiently important, national governments choose accounting separation. However, for low efficiency gains within a bundled firm national governments are stuck in a Prisoners' dilemma and would be better off coordinating on institutional separation. This result justifies major policy initiatives of the European Union and explains the behavior of national governments.