Risk Sharing, the Cost of Equity and the Optimal Capital Structure of the Regulated Firm
This paper considers the relationship between the regulator's pricing decision and the allocation of risk between consumers and shareholders. Consumers are willing to trade-off price variations against a lower expected price. Prices are higher in adverse economic conditions but shareholder returns are not necessarily lower. It might be optimal to insure shareholders against market risk to achieve a lower expected price. The socially optimal capital structure depends on consumers' and shareholders' attitudes to risk. There is only one very special set of conditions where the social optimum is 100% debt finance with the firm operating ona 'not-for-profit' basis.
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- Dasgupta, Sudipto & Nanda, Vikram, 1993. "Bargaining and brinkmanship : Capital structure choice by regulated firms," International Journal of Industrial Organization, Elsevier, vol. 11(4), pages 475-497.
- Cowan, Simon, 2004. "Optimal risk allocation for regulated monopolies and consumers," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 285-303, January.
- Gianni De Fraja & Clive Stones, 2004. "Risk and Capital Structure in the Regulated Firm," Journal of Regulatory Economics, Springer, vol. 26(1), pages 69-84, 07.
- Spiegel, Y. & Spulber, D.F., 1993.
"Capital Structure with Countervailing Incentives,"
93, Bell Communications - Economic Research Group.
- Spiegel, Yossef, 1994. "The Capital Structure and Investment of Regulated Firms under Alternative Regulatory Regimes," Journal of Regulatory Economics, Springer, vol. 6(3), pages 297-319, September.
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