@techreport{b9cd661e170747a2b63a34bab3439b8a,
title = "Regulatory Holidays and Optimal Network Expansion",
abstract = "We model the optimal regulation of continuous, irreversible, capacity expansion, in a model in which the regulated network firm has private information about its capacity costs, investments need to be financed out of the firm{\textquoteright}s cash flows from selling network access and demand is stochastic. If asymmetric information is large, the optimal mechanism consists of a regulatory holiday for low-cost firms, and a mark-up regime for higher-cost rms. With the regulatory holiday, a firm receives the full revenue of capacity sales, and expands capacity as if it were an unregulated monopolist. Under the mark-up regime, a firm receives only a fraction of the capacity revenues, and is obliged to expand capacity whenever the price for capacity reaches a threshold. The regulatory holiday is necessary to fund information rents to the most efficient firms, which invest relatively early, as direct investment subsidies are not feasible.",
keywords = " regulatory holiday, real option value, asymmetric information, optimal contracts",
author = "Bert Willems and Gijsbert Zwart",
year = "2016",
month = apr,
day = "18",
language = "English",
volume = "2016-015",
series = "CentER Discussion Paper",
publisher = "CentER, Center for Economic Research",
type = "WorkingPaper",
institution = "CentER, Center for Economic Research",
}