Modeling investment behavior under price cap regulation

Thomas Nagel () and Margarethe Rammerstorfer ()

Central European Journal of Operations Research, 2009, vol. 17, issue 2, 129 pages

Abstract: Motivated by the frequently observed criticism of the regulatory practice arising from companies in the industries concerned, we investigate the impact of regulation on investment behavior. Therefore, we model the investment timing and volume of a firm acting in a regulated market. When capping prices, the regulatory authority imposes a price ceiling on market prices. Accordingly, we use a real option approach where the price cap that limits possible future firm values enters the firm’s portfolio in form of a short call option position. By comparing this framework to a competitive benchmark model, we derive an optimal price setting rule for regulators. Moreover, it can be shown how deviations from this optimum affect the investment behavior of firms. Copyright Springer-Verlag 2009

Keywords: Regulation; Regulatory risk; Price cap; Real option; G 18; G 38; G 11; L 51 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10100-008-0078-7 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:cejnor:v:17:y:2009:i:2:p:111-129

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/10100

DOI: 10.1007/s10100-008-0078-7

Access Statistics for this article

Central European Journal of Operations Research is currently edited by Ulrike Leopold-Wildburger

More articles in Central European Journal of Operations Research from Springer, Slovak Society for Operations Research, Hungarian Operational Research Society, Czech Society for Operations Research, Österr. Gesellschaft für Operations Research (ÖGOR), Slovenian Society Informatika - Section for Operational Research, Croatian Operational Research Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().