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Incentives to (irreversible) investments under different regulatory regimes

Author

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  • Panteghini, Paolo

    (Universitý di Brescia)

  • Carlo Scarpa

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

  • Panteghini, Paolo & Carlo Scarpa, 2002. "Incentives to (irreversible) investments under different regulatory regimes," Royal Economic Society Annual Conference 2002 154, Royal Economic Society.
    • Handle: RePEc:ecj:ac2002:154
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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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