The Effect of Monopoly Regulation on the Timing of Investment

Jörg Borrmann and Gert Brunekreeft

No 9, Bremen Energy Working Papers from Bremen Energy Research

Abstract: This paper contributes a theoretical analysis of the effects of different types of regulation on the timing of monopoly investment in a setting with lumpy investment outlays. Concentrating on the case where investment increases the regulatory asset base, we distinguish between price-based regulation and cost-based regulation. Under cost-based regulation, investment triggers a change of regulated prices, whereas, under price-based regulation, investment does not affect them. To motivate investment, we focus on wear and tear leading to replacement investment and on demand growth resulting in expansion investment. Our main conclusion is that cost-based regulation accelerates investment compared to price-based regulation.

Keywords: Cost-based regulation; Expansion investment; Investment timing; Monopoly; Price-based regulation; Replacement investment (search for similar items in EconPapers)
JEL-codes: D42 G00 L51 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011-05
New Economics Papers: this item is included in nep-ind and nep-reg
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Citations: View citations in EconPapers (7)

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Related works:
Working Paper: The Effect of Monopoly Regulation on the Timing of Investment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bei:00bewp:0009

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