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Incentives to (Irreversible) Investments Under Different Regulatory Regimes

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  • Carlo Scarpa
  • Paolo Panteghini

Abstract

This paper addresses the issue of how regulatory constraints affect firm's investment choices when the firm has the option to delay investment. The RPI-x rule is compared to a profit sharing rule, which increases the x factor in case profits go beyond a given level. It is shown that these rules are identical in their impact on investment choices, in that the change in the option value exactly compensates the change in the “direct“ profitability of investment. The result is then analysed in the light of option theory and explained on the basis of the “bad news principle“.

Suggested Citation

  • Carlo Scarpa & Paolo Panteghini, 2001. "Incentives to (Irreversible) Investments Under Different Regulatory Regimes," CESifo Working Paper Series 417, CESifo.
    • Handle: RePEc:ces:ceswps:_417
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    References listed on IDEAS

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    Cited by:

    1. Paolo M. Panteghini & Carlo Scarpa, 2003. "Irreversible Investments and Regulatory Risk," CESifo Working Paper Series 934, CESifo.
    2. Michele Moretto & Paola Valbonesi, 2004. "Opting-out in profit-sharing regulation," Industrial Organization 0403001, University Library of Munich, Germany.

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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