Investment Size and Firm's Value under Profit Sharing Regulation
AbstractIn this article we analyse the effects of different regulatory schemes (price cap and profit sharing) on a firm’s investment of endogenous size. Using a real option approach in continuous time, we show that profit sharing does not affect a firm’s start-up decision relative to a pure price cap scheme. Unless the threshold after which profit sharing intervenes is very high, however, introducing a profit sharing element delays further investments: this decreases the present value of total investment. We also evaluate the reduction in the firm’s value due to profit sharing, linking this reduction to the option value of future investments.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1040.
Date of creation: 2003
Date of revision:
regulation; investment; profit sharing; real options; RPI-x;
Other versions of this item:
- Michele Moretto & Paolo M. Panteghini & Carlo Scarpa, 2003. "Investment Size and Firm’s Value Under Profit Sharing Regulation," Working Papers 2003.80, Fondazione Eni Enrico Mattei.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-05-09 (All new papers)
- NEP-CFN-2004-05-09 (Corporate Finance)
- NEP-COM-2004-05-02 (Industrial Competition)
- NEP-REG-2004-05-09 (Regulation)
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