REGULATION AND INNOVATION: LESSONS FROM THE AMERICAN RAILROAD INDUSTRY

The aim of this chapter is to construct and substantiate a relationship between two economic forces, deregulation and innovation, believed to be at the center of the railroad renaissance of the 1980s and 1990s. Economists and railway analysts have long suspected that government regulation of railroad industry structure, services, and rates stifled innovation and delayed technological progress. Such a causal relationship is impossible to prove statistically because of multicollinearity and the absence of a naturally occurring "laboratory experiment" in the data. At the same time, a strong before-and-after case cries out for examination, as it is apparent that railroads foundered under the final decades of Interstate Commerce Commission (ICC) regulation and have recovered remarkably since regulation was relaxed in 1980.