International Review of Environmental and Resource Economics > Vol 15 > Issue 1-2

The Promotion of Innovation in Regulated Network Industries

Seyed Reza Mirnezami, Research Institute for Science, Technology, and Industry Policy, Sharif University of Technology, Iran,
Suggested Citation
Seyed Reza Mirnezami (2021), "The Promotion of Innovation in Regulated Network Industries", International Review of Environmental and Resource Economics: Vol. 15: No. 1-2, pp 137-174.

Publication Date: 28 Jul 2021
© 2021 S. R. Mirnezami
Economic Theory
JEL Codes: D42L43L51L94
Electricity networksregulationtechnologycompetitionbusiness modelinnovation incentive


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In this article:
1 Introduction 
2 Evidence from Literature: Innovation in Regulated Industries 
3 Model and Discussion 
4 Conclusions and Policy Implications 
Appendix A Optimization for an Individual Incentive Contract 


The capital intensive network industries such as electricity and gas delivery infrastructures exhibit natural monopoly characteristics because of their high economy of scale relative to the size of the market. Due to the absence of direct competition in these regulated industries, infrastructure providers hardly undertake the appropriate level of innovation activities to optimise the operation and continuity of their services; a review is provided to show how different countries support innovation in the network industries. As innovation activities are costly and risky undertakings, a relevant query is how to incentivise innovation through economic regulations. This paper models three generic schemes of innovation promotion: individual incentive contracts, competitive innovation fund and cooperative innovation program. We show how each of these schemes affects the firms' incentives for innovation activities. The results confirm the effectiveness of all three schemes. However, implementing an individual incentive contract is information-intensive, while competitive or cooperative schemes do not require an informed regulator. A comparison is provided between the schemes.