Incentives to (Irreversible) Investments Under Different Regulatory Regimes

36 Pages Posted: 6 Apr 2001

See all articles by Paolo M. Panteghini

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Carlo Scarpa

University of Brescia; NERA Economic Consulting

Date Written: February 2001

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.

JEL Classification: L51

Suggested Citation

Panteghini, Paolo M. and Scarpa, Carlo, Incentives to (Irreversible) Investments Under Different Regulatory Regimes (February 2001). CESifo Working Paper Series No. 417. Available at SSRN: https://ssrn.com/abstract=265414

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Carlo Scarpa

University of Brescia ( email )

Via San Faustino 74B
Dipartimento di Scienze Economiche
25122 Brescia
Italy
+39+030+2988+833 (Phone)
+39+030+2988+839/840 (Fax)

NERA Economic Consulting ( email )

50 Main Street, 14th Floor
White Plains, NY 10606
United States

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