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Regulatory risk, investment, and welfare

Abstract

This paper assesses the allocative and distributional effects of uncertain regulatory constraints on rate of return, on price, and on competitive entry. A profit-maximizing firm responds to rate-of-return risk by substituting variable factors for sunk investment, but expands capacity when faced with either price risk or entry risk. Investors gain from the elimination of regulatory risk, a result that parallels Peltzman's contention that regulators could raise investor wealth by reducing risk. Consumers benefit from price and entry risk, but only under severe restrictions on tastes and technology. An inherent feature of government intervention, regulatory risk should be taken into account when comparing alternative policies for regulating (or deregulating) an industry.

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Woroch, G.A. Regulatory risk, investment, and welfare. Rev Ind Organ 3, 75–99 (1988). https://doi.org/10.1007/BF02229567

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Keywords

  • Government Intervention
  • Industrial Organization
  • Variable Factor
  • Severe Restriction
  • Inherent Feature