Optimal Regulation of Lumpy Investments

18 Pages Posted: 15 May 2012

See all articles by Gijsbert Zwart

Gijsbert Zwart

University of Groningen

Peter Broer

Tilburg University - CentER, Faculty of Economics and Business Administration; CPB Netherlands Bureau for Economic Policy Research

Date Written: May 14, 2012

Abstract

When a monopolist has discretion over the timing of infrastructure investments, regulation of post-investment prices interferes with incentivizing socially optimal investment timing. In a model of regulated lumpy investment under uncertainty, we study regulation when the regulator can condition price caps on investment timing. We analyse optimal regulation when there is asymmetric information on investment costs and regulation has to respect a budget constraint. We show that optimal regulation involves a price cap that decreases as a function of the monopolist's chosen investment time.

Keywords: investment under uncertainty, asymmetric information, optimal regulation, budget constraint

JEL Classification: D81, D82, L51

Suggested Citation

Zwart, Gijsbert and Broer, Peter, Optimal Regulation of Lumpy Investments (May 14, 2012). TILEC Discussion Paper No. 2012-020, Available at SSRN: https://ssrn.com/abstract=2057859 or http://dx.doi.org/10.2139/ssrn.2057859

Gijsbert Zwart (Contact Author)

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Peter Broer

Tilburg University - CentER, Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/broer/

CPB Netherlands Bureau for Economic Policy Research ( email )

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Netherlands
+31 70 33 83 478 (Phone)
+31 70 33 83 350 (Fax)

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