Price Regulation and the Cost of Capital
AbstractThis paper investigates how price regulation under moral hazard can affect a regulated firmâ€™s cost of capital. We consider stylised versions of the two most typical regulatory frameworks that have been applied over the last decades by regulators: Price Cap and Cost of Service. We show that there is a trade-off between lower operational costs and a higher cost of capital under Price Cap regulation and higher operational costs and lower cost of capital under Cost of Service regulation. As a result, when the extent of moral hazard is not significant, Price Cap regulation generates lower welfare than the Cost of Service regulation.
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Bibliographic InfoPaper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 413.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-23 (All new papers)
- NEP-BEC-2010-10-23 (Business Economics)
- NEP-REG-2010-10-23 (Regulation)
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.:
- Gianni De Fraja & Clive Stones, 2004. "Risk and Capital Structure in the Regulated Firm," Journal of Regulatory Economics, Springer, vol. 26(1), pages 69-84, 07.
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