Consistent Regulatory Policy under Uncertainty

Michael J. Brennan and Eduardo S. Schwartz

Bell Journal of Economics, 1982, vol. 13, issue 2, 506-521

Abstract: This article is concerned with the effects of regulation on the risk and value of the regulated firm in a dynamic context. Current regulatory practice is shown to be logically deficient, since it ignores the effect of regulatory policy on the cost of capital and therefore on the appropriate allowed rate of return. A notion of consistency in regulatory policy is developed, and it is shown how consistent regulatory policies may be implemented once the valuation problem is solved.

Date: 1982
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