Capital Investment Strategies under Uncertain Regulation
AbstractThis article presents a positive model of investment choices by regulated firms that offers rational explanations for electric utilities' recent behavior of delaying investment and choosing smaller, shorter-lead-time technologies. The model assumes that firms' capital investments require long lead times, during which the value of the completed project is uncertain. Firms anticipate regulatory profit and loss restrictions, but expectations about the value of a completed project change over time. Firms' decisions are modelled using an option pricing approach that incorporates the value of flexibility to delay or abandon projects. The article shows why rational firms invest in smaller, shorter-lead-time plants, or delay investment when faced with uncertain and asymmetric profit and loss restrictions. It also looks at decisions to abandon partially completed plants, and shows that the static result that a higher cost allowance on abandoned projects increases the incentive for investment is not generally true in a dynamic model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 24 (1993)
Issue (Month): 4 (Winter)
Contact details of provider:
Web page: http://www.rje.org
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Ulrich Blum & Christian Growitsch & Niels Krap, 2006. "Network Investment and the Threat of Regulation – Preventing Monopoly Exploitation or Infrastructure Construction?," IWH Discussion Papers 7, Halle Institute for Economic Research.
- Stratford Douglas & Thomas A. Garrett & Russell M. Rhine, 2009. "Disallowances and overcapitalization in the U.S. electric utility industry," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32.
- Sumit Agarwal & David Lucca & Amit Seru & Francesco Trebbi, 2012. "Inconsistent Regulators: Evidence From Banking," NBER Working Papers 17736, National Bureau of Economic Research, Inc.
- R. Poudineh & T. Jamasb, 2013. "Determinants of Investment under Incentive Regulation: The Case of Norwegian Electricity Distribution Networks," Cambridge Working Papers in Economics 1324, Faculty of Economics, University of Cambridge.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.