Investment Size and Firm's Value under Profit Sharing Regulation
In this article we analyse the effects of different regulatory schemes (price cap and profit sharing) on a firmâ€™s investment of endogenous size. Using a real option approach in continuous time, we show that profit sharing does not affect a firmâ€™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 firmâ€™s value due to profit sharing, linking this reduction to the option value of future investments.
|Date of creation:||2003|
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