Philippe Gagnepain*, Luis Aguiar
- This article was originally published in the March 2021 edition of the 5 papers…in 5 minutes.
The creation of technology spillovers in an industry is a process in which firms acquire new knowledge about innovation thanks to the dissemination of findings from the research and development activities of their competitors. These spillovers are key ingredients in firms’ productivity training and economic growth (1). Economics literature has covered extensively the questions linked to innovation and the creation of spillovers, both in measuring these and in identifying the factors that facilitate their production.
In this article, Aguiar and Gagnepain address the question of the impact of incentive contracts on the production of spillovers in the case of the regulation of mass transport companies (2). Two characteristics play important roles in their model. First, the spillovers are measured within industry groups (Connex, Kéolis, and Transdev in the period 1987-2001), which together provide mass transport services in most of the urban networks in France. In practice, each of these groups has a simultaneous presence in several urban networks. Thus, local transport companies belonging to one company can benefit from the exchange of information and experience of each operator providing services in networks with different characteristics. All the networks used by the same company thereby benefit from the innovation initiatives (in productivity and cost reduction) taken by all members of the group.
Next, the incentive power of each mass transport contract has a direct influence on the intensity of the research and development activities of each local operator. The contract defines the rules of payment and the reimbursement of operating costs. Two types of contracts are generally used –– the fixed-price contract and the cost-of-service agreement. With the former, the operator receives subsidies to cover expected operating losses, and thus has a strong incentive to create innovations and reduce operating costs. In the case of the cost-of-service contract, the subsidies guarantee the full reimbursement of losses incurred and thus creates no incentive for firms to reduce their costs (3).
Intensive use of fixed-price contracts in the transport networks operated by the same industry group thus multiplies local initiatives for productivity and cost-reduction efforts and intensifies spillover effects within the group. The authors suggest that sharing information about the cost-reduction activities of several firms regulated by fixed-price contracts allows them to benefit from much greater cost reductions than in an industry organisation in which there is no exchange of information. Consequently, while it is acknowledged that fixed-price contracts are good tools for creating economic efficiency, it is important to introduce them in different urban networks simultaneously in order to benefit from technology spillovers.
In conclusion, it is in the central government’s interest to promote the use of fixed-price contracts in the mass transport sector, and to guarantee significant market shares to transport groups so that they can operate in several networks simultaneously and thus profit from technology spillovers in those networks. Greater concentration in the industry would mean a loss of competition in the process of granting mass transport concession through calls for tenders, but as a counter-balance, it would lead to productivity gains and the creation of technology spillovers. Measuring the significance of each of these different effects is an empirical task of the first order for researchers interested in the sector.
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(1) Grossman, G. M., & Helpman, E. (1991). Innovation and growth in the global economy. MIT Press.
(2) On this subject, the article of reference is: Laffont, J. J., & Martimort, D. (2002). The theory of incentives: the principal-agent model. Princeton university press.
(3) Forthcoming in The Encyclopedia of Transport edited by Roger Vickerman, Elsevier
References
Original title of the article: Absorptive Capacity, Knowledge Spillovers and Incentive Contracts
Published in: forthcoming in The Encyclopedia of Transport edited by Roger Vickerman, Elsevier
Available at: https://www.parisschoolofeconomics.eu/docs/gagnepain-philippe/aguiar-gagnepain-july-2020.pdf
Credits (picture) : Shutterstock lauravr
* PSE member