Investment Size and Firm's Value under Profit Sharing Regulation

Michele Moretto, Paolo Panteghini and Carlo Scarpa

No 1040, CESifo Working Paper Series from CESifo

Abstract: In this article we analyse the effects of different regulatory schemes (price cap and profit sharing) on a firm’s investment of endogenous size. Using a real option approach in continuous time, we show that profit sharing does not affect a firm’s start-up decision relative to a pure price cap scheme. Unless the threshold after which profit sharing intervenes is very high, however, introducing a profit sharing element delays further investments: this decreases the present value of total investment. We also evaluate the reduction in the firm’s value due to profit sharing, linking this reduction to the option value of future investments.

Keywords: regulation; investment; profit sharing; real options; RPI-x (search for similar items in EconPapers)
JEL-codes: D81 D92 G31 L51 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-cfn, nep-com and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Investment Size and Firm’s Value Under Profit Sharing Regulation (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1040

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