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The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation

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  • Kira R. Fabrizio

Abstract

How are firms' investment decisions influenced by potential instability in the regulatory environment? Firms that anticipate regulatory change may alter their responses to current policies, potentially rendering those policies less effective. This article explores the pattern of investments in renewable generation assets in the US electricity industry following the implementation of Renewable Portfolio Standard (RPS) policies. Viewing these investments through the lens of transaction cost economics, the article investigates whether the likelihood of future regulatory change in a state dampened (or spurred) firm responses to RPS policies in that state. I find that firms invested less in new assets in states that had previously passed and repealed legislation to restructure the electricity industry, indicating that perceived regulatory instability reduces new investment and undermines policy goals. (JEL D02, D81, D23, D21, K2) The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Kira R. Fabrizio, 2013. "The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 29(4), pages 765-798, August.
    • Handle: RePEc:oup:jleorg:v:29:y:2013:i:4:p:765-798
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    File URL: http://hdl.handle.net/10.1093/jleo/ews007
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    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • K2 - Law and Economics - - Regulation and Business Law

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