Incentives to (irreversible) investments under different regulatory regimes
AbstractThis paper addresses the issue of how regulatory constraints affect firm's investment choices when the firm has the 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 these rules are identical in their impact on investment choices, in that the change in the option value exactly compensates the change in the ``direct'' profitability of investment. The result is then analysed in the light of option theory and explained on the basis of the ``bad news principle''.
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Bibliographic InfoPaper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 154.
Date of creation: 29 Aug 2002
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Other versions of this item:
- Carlo Scarpa & Paolo Panteghini, 2001. "Incentives to (Irreversible) Investments Under Different Regulatory Regimes," CESifo Working Paper Series 417, CESifo Group Munich.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-07-08 (All new papers)
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