Incentives to (irreversible) investments under different regulatory regimes

Paolo Panteghini and Carlo Scarpa

No 154, Royal Economic Society Annual Conference 2002 from Royal Economic Society

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''.

Date: 2002-08-29
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Working Paper: Incentives to (Irreversible) Investments Under Different Regulatory Regimes (2001)
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