Optimal Regulation of Lumpy Investments

G. Zwart, D.P. Broer

Research output: Working paperDiscussion paperOther research output

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.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages18
Volume2012-020
Publication statusPublished - 2012

Publication series

NameTILEC Discussion Paper
Volume2012-020

Keywords

  • investment under uncertainty
  • asymmetric information
  • optimal regulation
  • budget constraint

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