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Investment Size and Firm’s Value Under Profit Sharing Regulation

Author

Listed:
  • Michele Moretto

    (Economics Department, University of Brescia)

  • Paolo M. Panteghini

    (Economics Department, University of Brescia)

  • Carlo Scarpa

    (Economics Department, University of Brescia)

Abstract

In 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.

Suggested Citation

  • 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.
    • Handle: RePEc:fem:femwpa:2003.80
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    References listed on IDEAS

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    13. Paolo M. Panteghini & Carlo Scarpa, 2003. "Irreversible Investments and Regulatory Risk," CESifo Working Paper Series 934, CESifo.
    14. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
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    Cited by:

    1. Moretto Michele & Valbonesi Paola, 2007. "Firm Regulation and Profit Sharing: A Real Option Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-34, November.
    2. Michele Moretto & Paola Valbonesi, 2004. "Opting-out in profit-sharing regulation," Industrial Organization 0403001, University Library of Munich, Germany.

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    More about this item

    Keywords

    Regulation; Investment; Profit sharing; Real options; RPI-x;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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