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Profit Sharing and Investment by Regulated Utilities: a Welfare Analysis

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Author Info
Michele Moretto () (Università di Padova)
Paolo M. Panteghini (Università di Brescia)
Carlo Scarpa (Università di Brescia)

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Abstract

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 delay a firm’s start-up investment relative to a pure price cap scheme. Profit sharing does not necessarily affect total investment either, if the threshold for profit sharing is high enough. Only a profit sharing intervening for low profit levels may delay further investments. We also evaluate the effects of profit sharing on social welfare, determining the level of profit that should optimally trigger tighter regulation: profit sharing should be less stringent in sectors where there are bigger investment opportunities.

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Publisher Info
Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0059.

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Length: 36 pages
Date of creation: Nov 2007
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Handle: RePEc:pad:wpaper:0059

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Related research
Keywords: regulation investment profit sharing real options RPI-x

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Find related papers by 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 - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  5. Panteghini, Paolo & Scarpa, Carlo, 2003. "The Distributional Efficiency of Alternative Regulatory Regimes: A Real Option Approach," International Tax and Public Finance, Springer, vol. 10(4), pages 403-18, August. [Downloadable!] (restricted)
    Other versions:
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  15. Hausman, Jerry & Myers, Stewart, 2002. "Regulating the United States Railroads: The Effects of Sunk Costs and Asymmetric Risk," Journal of Regulatory Economics, Springer, vol. 22(3), pages 287-310, November. [Downloadable!] (restricted)
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  25. Ai, Chunrong & Sappington, David E M, 2002. "The Impact of State Incentive Regulation on the U.S. Telecommunications Industry," Journal of Regulatory Economics, Springer, vol. 22(2), pages 133-59, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michele Moretto & Paola Valbonesi, 2007. "Firm Regulation and Profit Sharing: A Real Option Approach," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 7(1), pages 1714-1714. [Downloadable!] (restricted)
    Other versions:
  2. Amedeo Fossati & Rosella Levaggi, 2008. "Delay is not the answer: waiting time in health care & income redistribution," Working Papers 0801, University of Brescia, Department of Economics. [Downloadable!]
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