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Timing of Investment and Dynamic Pricing in Privatized Sectors

  • Sandro Brusco

    ()

    (Department of Economics, Stony Brook University)

  • Ornella Tarola

    ()

    (DAES, University of Rome ‘La Sapienza’)

  • Sandro Trento

    ()

    (Dipartimento di informatica e studi aziendali, Facoltà di Economia, Università di Trento)

In equipment-intensive sectors — such as water utilities, power generation, gas — billions of dollars are spent in capital equipment. We discuss and characterize the optimal policy of a profit-maximizing firm and compare it with the optimal policy of a welfare-maximizing planner. When there is no tecnical progress, the duration of the plant is longer for a private firm. With technical progress, we show that duration tends to increase when the installed capacity increases over time, while it tends to decrease when technical progress reduces operating costs. Under some conditions we also show that when capacity expands over time the duration of the plant is shorter for a public firm than for a private firm.

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File URL: http://www.stonybrook.edu/economics/research/papers/2012/BruscoTarolaTrento.pdf
File Function: First version, 2012
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Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 12-01.

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Date of creation: Jan 2012
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Handle: RePEc:nys:sunysb:12-01
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  1. Boucekkine, Raouf & Del Rio, Fernando & Licandro, Omar, 1999. "Endogenous vs exogenously driven fluctuations in vintage capital models," CEPREMAP Working Papers (Couverture Orange) 9901, CEPREMAP.
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