Analysis of Investment Incentives and the Influence of Growth Options in Regulated Industries
In this contribution, a regulated company’s investment incentives are analyzed in a setting with cost-based regulation, a two-stage investment and growth options. First, it is shown that in the first period, at the first stage of the investment, the company will clearly underinvest from the regulator’s perspective. Second, a specific formula for the calculation of the regulated price in the second period is derived, which will set incentives for the company to choose the capacity level which the regulator considers efficient.
KeywordsDemand Function Investment Decision Capacity Level Investment Incentive Growth Option
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