Optimising investment in regulated airports

Regulation is known to change the incentives a firm faces to invest, inducing some firms to invest too much, and others too little. Regulators must set prices to achieve several conflicting objectives, including providing the incentive to invest. Optimising investment is a particular problem in regulated airports, and many of the inefficiency problems noted with airports can be ascribed to inadequate or excessive investment. Airport regulation is also expected to address issues of congestion, quality of service and productive efficiency, while, in many cases, at the same time achieving distributional objectives. This paper explores the properties of alternative forms of regulation, including price caps and cost plus, in achieving the optimal level of investment, along with meeting other objectives. Cost based regulation can have advantages over price caps in some contexts. The optimisation task is helped considerably by the existence of secondary instruments, including slot controls and conditional price caps.