Market Liberalization, Regulatory Uncertainty, and Firm Investment

Abstract

Motivated by the German postal market, this paper analyzes the effects of regulatory uncertainty about labor costs for investment into a liberalized market. We distinguish between the external investment margin (market entry) and the internal investment margin (technology) and establish that regulatory uncertainty affects these margins differently, encouraging market entry but discouraging investment at the internal margin. As a consequence, the impact of regulatory uncertainty on competition in liberalized markets is the result of these two countervailing forces.