The Distributional Efficiency of Alternative Regulatory Regimes: A Real Option Approach
This paper studies the effects of regulatory constraints on firm's irreversible investment decisions. The RPI - x rule is compared to a profit sharing rule, which increases the x factor in case profits go beyond a given level. When the firm has an option to delay investment, these rules have the same impact on investment choices. As profit sharing has a greater ability to extract rents, however, it is more efficient than the RPI - x rule. Copyright 2003 by Kluwer Academic Publishers
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