Irreversible Investments and Regulatory Risk

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 934

Classification and Topics

• Classification: Wirtschaft
• Subject: regulation ; investment ; RPI-x ; profit sharing

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Panteghini, Paolo M. ; Scarpa, Carlo
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/76431
• Last update: 10.03.2025, 11:43 AM CET