Access Holidays and the Timing of Infrastructure Investment
For risky infrastructure investment, 'regulatory truncation' can diminish investment incentives. We model the truncation problem, showing the link to regulatory commitment, and derive optimal state-contingent access prices. If regulators cannot commit ex ante to specific ex post access prices then a regulatory commitment to a fixed period free of access - an access holiday - can improve investment incentives. We establish conditions under which an access holiday may improve investment timing and show how an optimal holiday depends on the underlying profit flows from the investment. In particular, we show that an optimal holiday may leave investors with positive expected economic profits. Copyright � 2004 Economic Society of Australia..
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Volume (Year): 80 (2004)
Issue (Month): 248 (03)
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