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The Effect Of Monopoly Regulation On The Timing Of Investment

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Executive Summary

This paper contributes a theoretical analysis of the effects of different types of regulation on the timing of monopoly investment in a setting with lumpy investment outlays. Concentrating on the case where investment increases the regulatory asset base, the authors distinguish between price-based regulation and cost-based regulation. Under cost-based regulation, investment triggers a change of regulated prices, whereas, under price-based regulation, investment does not affect them. To motivate investment, they focus on wear and tear leading to replacement investment and on demand growth resulting in expansion investment. Their main conclusion is that cost-based regulation accelerates investment compared to price-based regulation.

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