Irreversible Investments and Regulatory Risk

No 934, CESifo Working Paper Series from CESifo

Abstract: This paper addresses the issue of how regulatory constraints affect firm’s investment choices when the firm has an option to delay investment. The RPI-x rule is compared to a profit sharing rule, which increases the x factor in case profits go beyond a given level. It is shown that a pure price cap and profit sharing are identical in their impact on investment choices: the change in the option value that we have with a profit sharing regime exactly compensates the change in the “direct“ profitability of investment. Regulatory risk – breaching of the regulatory contract – may or may not affect negatively investment decisions. Even if a distortion exists, we show that this distortion is the same, even if a pure price cap could be considered riskier than a profit sharing rule.

Keywords: regulation; investment; RPI-x; profit sharing (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-com and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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