IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_1040.html
   My bibliography  Save this paper

Investment Size and Firm's Value under Profit Sharing Regulation

Author

Listed:
  • Michele Moretto
  • Paolo Panteghini
  • Carlo Scarpa

Abstract

In this article 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 affect a firm’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 firm’s value due to profit sharing, linking this reduction to the option value of future investments.

Suggested Citation

  • Michele Moretto & Paolo Panteghini & Carlo Scarpa, 2003. "Investment Size and Firm's Value under Profit Sharing Regulation," CESifo Working Paper Series 1040, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1040
    as

    Download full text from publisher

    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1040.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-557, June.
    2. Paolo M. Panteghini & Carlo Scarpa, 2003. "Irreversible Investments and Regulatory Risk," CESifo Working Paper Series 934, CESifo Group Munich.
    3. Dixit, Avinash, 1995. "Irreversible investment with uncertainty and scale economies," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 327-350.
    4. Weisman, Dennis L, 1993. "Superior Regulatory Regimes in Theory and Practice," Journal of Regulatory Economics, Springer, vol. 5(4), pages 355-366, December.
    5. M.E. Beesley & S.C. Littlechild, 1989. "The Regulation of Privatized Monopolies in the United Kingdom," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 454-472, Autumn.
    6. Lyon, Thomas P, 1996. "A Model of Sliding-Scale Regulation," Journal of Regulatory Economics, Springer, vol. 9(3), pages 227-247, May.
    7. Sappington, David E. M. & Weisman, Dennis L., 1996. "Revenue sharing in incentive regulation plans," Information Economics and Policy, Elsevier, vol. 8(3), pages 229-248, September.
    8. Colin Mayer & John Vickers, 1996. "Profit-sharing regulation: an economic appraisal," Fiscal Studies, Institute for Fiscal Studies, vol. 17(1), pages 1-18, February.
    9. 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 133-159, September.
    10. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    11. Burns, Philip & Turvey, Ralph & Weyman-Jones, Thomas G, 1998. "The Behaviour of the Firm under Alternative Regulatory Constraints," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(2), pages 133-157, May.
    12. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    13. Crew, Michael A & Kleindorfer, Paul R, 1996. "Incentive Regulation in the United Kingdom and the United States: Some Lessons," Journal of Regulatory Economics, Springer, vol. 9(3), pages 211-225, May.
    14. Panteghini, Paolo & Scarpa, Carlo, 2003. "The Distributional Efficiency of Alternative Regulatory Regimes: A Real Option Approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(4), pages 403-418, August.
    15. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michele Moretto & Paola Valbonesi, 2004. "Opting-out in profit-sharing regulation," Industrial Organization 0403001, EconWPA.
    2. Moretto Michele & Valbonesi Paola, 2007. "Firm Regulation and Profit Sharing: A Real Option Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-34, November.

    More about this item

    Keywords

    regulation; investment; profit sharing; real options; RPI-x;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1040. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe). General contact details of provider: http://edirc.repec.org/data/cesifde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.