Investment Size and Firm's Value Under Profit Sharing Regulation

33 Pages Posted: 6 Nov 2003 Last revised: 31 Aug 2008

See all articles by Michele Moretto

Michele Moretto

University of Padua, Dep of Economics and Management

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: September 1, 2003

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

JEL Classification: L51, D81, D92, G31

Suggested Citation

Moretto, Michele and Panteghini, Paolo M. and Scarpa, Carlo, Investment Size and Firm's Value Under Profit Sharing Regulation (September 1, 2003). FEEM Working Paper No. 80.2003; CESifo Working Paper Series No. 1040. Available at SSRN: https://ssrn.com/abstract=456080 or http://dx.doi.org/10.2139/ssrn.456080

Michele Moretto

University of Padua, Dep of Economics and Management ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

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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