observable and unobservable determinants of replacement of home appliances despite the dominant role of replacement purchases in many consumer durable categories the research in this area has not been extensive only in the last few years has the economic theory made progress towards a more rigorous analysis of the dynamic nature involved in replacement decisions as a consequence of this applied researchers have switched from conventional discrete choice models to new econometric techniques e g duration analysis that allow for richer relationships between socioeconomic variables characteristics of the durable good and the likelihood of its replacement over time our study focuses on two home appliances taken from the residential energy consumption survey recs based on a duration model that allows for unobserved heterogeneity across households we conclude that household demographics and product features both observable and unobservable in general have statistical power to explain replacement decisions over time

decisions to replace consumer durables goods an econometric application of wiener and renewal processes current sales of most consumer durable goods are accounted for by replacements however only in recent years has the economic literature provided a more rigorous analysis of replacement purchases by incorporating elements of dynamic programming and of the theory of stochastic processes this paper is an empirical study of household replacement decisions modeled as an optimal stopping rule using data from the residential energy consumption survey recs of the u s department of energy we conclude that demographic variables operation and replacement costs and equipment characteristics may affect ownership spells of appliances such as electric heaters and central air conditioners

effects of the change from rate of return to price cap regulation this article focuses on the use of incentive regulation in the telephone industry in the united states we first characterize some of the difficulties that have led regulators to move away from traditional rate ofreturn cost based regulation and toward systems of regulation that provide incentives for increasingly efficient production allowing firms to share in the social gains from efficiency with increased profits we then discuss the basic structure of incentive regulation as it has most commonly been adopted in the telephone industry in the united states the first is price cap pc regulation which typically allows the firm to

conglomerates and regulation conglomerates operating integrated productions in different regulated and unregulated sectors may benefit of scope economies however the precise size of these synergies is often unknown to both rival firms and regulators we show that the conglomerate s private information on scope economies may negatively affect both the regulated and the unregulated sectors depending on the precise nature of competition strategic substitutes or complements we also unveil a novel effect of regulation that involves an informational externality to the conglomerate s rivals notwithstanding these complications and independently of the nature of competition we show that in our model it is desirable as for welfare to let the firm run integrated productions unless diseconomies of scope may realize jel l51 l43 l52

commitment and fairness in a dynamic regulatory relationship this paper considers a multiperiod model of a regulated firm that has stationary private information which may be revealed through performance if it cannot make commitments to future policies the regulator has an incentive to exploit any information the firm reveals and laffont and tirole show that there is no regulatory policy that is separating over any closed interval a fairness arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods the properties of such arrangements are studied and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment

testing efficiency in intermediate regulated industries abstract a model is developed that permits the testing of hypotheses concerning capital and pricing efficiency in intermediate regulated industries application to us electric utility data for 1988 1990 suggests that low allowable rates of return may have induced shortfalls in capacity

regulatory options and price cap regulation we construct a simple model of the regulatory process in which a monopoly firm has private information about its capabilities and its cost reducing activities the optimal regulatory policy offers the firm a choice between two regulatory regimes one of which resembles pricecap regulation the other regime has thefirm share realized gains in surplus with consumers we examine the optimal linking of the two regimes and show how the optimal regulatory policy varies with changes in the technological climate in the industry and with the nature of the information asymmetry between regulator and firm

diversification by regulated monopolies and incentives for cost reducing r d the regulator is able to reduce the regulated revenue requirement due to the cost savings resulting from economies of scope then some of the benefits of joint production ultimately may be passed on to the consumers of the regulated products in the form of lower prices diversification into unregulated markets also increases the firm s incentives to engage in process innovation by providing opportunities for earning profits in unregulated markets investments in process innovation can lead to lower future costs of producing the regulated product and potential future price reductions to regulated customers i present a model of the firm s decision to diversify into an unregulated market and look at the implications of that decision for a firm s incentive to innovate and for consumer welfare the firm s choice is strongly influenced by the extent to which the regulator reduces the amount of fixed cost included in the regulated revenue requirement should the firm choose to diversify i show that if the regulator is able to observe production costs accurately at the time of a rate review then diversification increases the firm s incentive to innovate and leads to higher gains in consumers welfare over time

regulating horizontal diversification abstract this paper investigates the optimal design of diversification rules for regulated enterprises diversification generates profit in non core markets that can be shared with core customers however a diversified firm may divert its attention and effort to non core operations causing consumer welfare in core markets to decline diversification generally results in lower prices and higher powered reward structures in core markets surprisingly diversification is not always directed into the non core markets where the expected contribution of the regulated firm is most pronounced furthermore diversification may be permitted more often as the potential losses from effort diversion increase

default probabilities for mortgages abstract models now exist for valuing the default option embedded in a mortgage implicitly these models generate all the information necessary to determine the probability of default in any possible situation economists and policymakers may find such default probabilities considerably more interesting than the nonobservable dollar value of the default option this paper provides the analytical procedure necessary to calculate such probabilities and presents a wide range of results the decision to terminate a mortgage results in the loss of the options to default or prepay in the future because of this consideration the price of a house must fall below the point of zero equity before a rational borrower defaults we provide evidence that even in the absence of transaction costs this value of delay results in substantial levels of negative equity being observed without default occurring in fact by not accounting for the value of delay most of the current empirical literature cited in this article substantially overestimates the role of transaction costs in the decision to default

the impact of alternative forms of state regulation of at t on direct dial long distance telephone rates federal and state regulatory agencies have traditionally used rate of return regulation to set profit and rate levels for utilities a price cap framework in which the regulatory agency sets a maximum rate below which the regulated utility has pricing flexibility is possibly a more efficient alternative to rate of return regulation this article presents an econometric analysis that compares at t s prices of intrastate long distance telephone service in states that allow at t pricing flexibility with those in states that do not the results of this analysis suggest that at t s daytime evening nighttime and weekend rates are significantly lower in states that allow pricing flexibility than in states that use rate of return regulation

monitoring moral hazard asymmetric information and risk sharing in procurement contracting this article characterizes the optimal procurement contract for a monopsonistic purchaser who contracts with a risk averse supplier with private information about his costs and who contributes an unobservable effort the costs incurred by the supplier may be uncertain and the purchaser has access to a monitor of costs that may be subject to noise that complicates risk sharing the purchaser prefers to respond to the observability problem with afixed price contract and to respond to the private information problem with a cost plus contract with uncertain costs and a perfect monitor the optimal contract relieves the supplier of some risk and the purchaser prefers that the effort of the supplier be subsidized with deterministic costs and a noisy monitor the optimal contract places risk on the supplier and the purchaser may prefer that the effort of the supplier be taxed procurement of goods and services is an important form of economic exchange that is often characterized by bargaining and contracting rather than by exchange in a competitive market the procurement setting analyzed here corresponds to the case in which the purchaser is a monopsonist who contracts with a single supplier as in the case of the department of defense contracting for the delivery of a military system in such a setting a principalagent model may be a reasonable representation of the relationship between the purchaser and the supplier and the economics of the procurement arrangement is then captured in the contract when the item procured is standardized the relevant information is likely to be common knowledge and risk may be minimal in such a case a fixed price contract may satisfactorily resolve the purchaser s contracting problem in contrast the model considered here is intended to represent the procurement of a nonstandardized item about which information is incomplete costs are uncertain and observability of supplier costs by the purchaser is limited procurement thus is complicated by the conjunction of adverse selection risk sharing and moral hazard problems

hybrid revenue caps and incentive regulation abstract this paper analyzes the incentive effects of a hybrid revenue cap on a regulated monopolistic firm using non discriminatory two part pricing it is shown that the fixed and the variable part of the cap have different meanings in terms of regulation the fixed part of a hybrid revenue cap should be used to control the profit level of the regulated firm while the variable part should be used to control the social efficiency level since detailed information about the firm s cost function is required to determine the revenue cap parameters the overall conclusion is that revenue caps are a rather bad idea in the area of incentive regulation

price cap regulation and information acquisition abstract in this paper we endogenize the information structure under price cap regulation we show that in order to induce the firm to acquire valuable but costly information price cap mechanisms need to ensure high profits to the firm further we compare incentives for information acquisition under price cap regulation and under the optimal mechanism designed to deal with the standard case where asymmetric information is assumed we show that the latter provides higher incentives for information acquisition and that the welfare loss associated with price cap regulation with respect to the optimal regulatory mechanism increases when the issue of information acquisition is considered

the interaction of debt financing cash grants and the optimal investment policy under uncertainty abstract significant progress has been made toward understanding a levered firm s optimal investment policy under uncertainty to date however not much work has concentrated on the time scale trade off and collectively held real options we employ a game theoretic real option model between a firm and a government to analyze the effect of uncertainty and investment stimulus in the form of cash grants on optimal investment timing financing and investment scaling we find that the jointly held real option between the firm and the government leads to underinvestment regardless of whether the firm has the possibility to issue debt subsidies however reduce the level of underinvestment notably the results indicate that even though levered firms receive less support they invest more than unlevered firms this challenges recent findings that a firm s optimal investment level is not affected by the way it finances a project similarly we find that for realistic parameter constellations the levered firm s optimal investment threshold can be higher than that of its unlevered counterpart this indicates that the availability of tax shield benefits does not necessarily serve as an incentive to invest earlier finally we show that the effect of cash flow uncertainty on the equilibrium level of grants is ambiguous and triggers the switch from a subsidy to non subsidy regime

paradoxical effects of increasing the normal retirement age a prospective evaluation abstract a life cycle model that incorporates both disability insurance di and old age insurance oai is developed to study social security reforms and is compared to an alternative model without di the model with di predicts that increasing the normal retirement age nra causes a decrease in employment and an increase in di receipt and that the decrease of payroll tax revenue and the increase of di expenses combined offset about 40 of the decrease of oai expenses these paradoxical effects of increasing the nra are absent from the model without di i employ both models to search for reforms that will balance the government budget in an economy with an aging population which has the demographics for the year 2100 and find that the required change in tax and benefit rules differ substantially across the two models

real investment options with multiple sources of rare events abstract we value real investment options when the underlying asset follows a mixed jump diffusion process involving various types sources of rare events jumps these jumps are assumed independent of each other with each type having a log normally distributed jump size and a random poisson distributed arrival time they may represent uncertainties about the arrival and impact on the underlying investment of new information concerning technological innovation competition political risk regulatory effects and other sources an analytic solution is presented for european claims call or put options with multiple sources of jumps a discrete time markov chain methodology implemented within a finite difference scheme is proposed for the valuation of american as well as european options the approach is also applicable to financial options with multiple types of rare events the approach is illustrated through valuing complex real options with compound features involving interactions between optimal investment and subsequent operating decisions specifically we value a growth option and an extension option

replacement decisions with multiple stochastic values and depreciation abstract we develop an analytical real option solution to the after tax optimal timing boundary for a replaceable asset whose operating cost and salvage value deteriorate stochastically we construct a general replacement model from which seven other particular models can be derived along with deterministic versions we show that the presence of salvage value and tax depreciation significantly lowers the operating cost threshold that justifies and thus hastens replacement although operating cost volatility increases defer replacement increases in the salvage value volatility hasten replacement albeit modestly while increases in the correlation between costs and salvage value defer replacement reducing the tax rate or depreciation lifetime or allowing an investment tax credit yield mixed results these results are also compared with those of less complete models and deterministic versions showing that failure to consider several stochastic variables and taxation in the replacement process may lead to sub optimal decisions

biodiesel investment in a disruptive tax credit policy environment abstract an investigation of poisson type policy jumps on biodiesel investment considers the theory of investment under uncertainty the analysis studies the probability of implementing a policy if it is not in effect and the probability of withdrawal if it is in effect an application models the policy switching regime of the discontinuous u s federal tax credit of 1 00 per gallon on biodiesel results support that time inconsistent government policies do lead to market uncertainty the analysis reveals a pronounced negative impact on decisions to invest in a biodiesel refinery results do indicate a consistent policy switching regime may not be that disruptive to the emerging biodiesel industry it is policy uncertainty that drives the option pricing thresholds and a consistent policy switching does not increase the uncertainty

capital budgeting for interrelated projects a real options approach this paper explores the effect of project interrelationships on investment decisions and project values in a real options framework we examine in detail the mutually exclusive case where a firm may invest in the development stage of two projects and then may select only a single project to implement the firm can develop the projects in parallel or in sequence the choice of development policy depends on the relative values of the embedded options for each strategy sequential development is shown to be superior to parallel development when projects have highly correlated values and when they require a large commitment of capital for development are short term in nature and have relatively low volatility we also show that the optimal ordering of sequential projects does not always begin with the most profitable project

the effect of expanding medicaid eligibility on supplemental security income program participation abstract low income adults without dependent children have historically had few paths to obtain public health insurance unless they qualified for supplemental security income ssi cash benefits because of a disability however in states that expand their medicaid programs childless adults may obtain medicaid without undergoing an intensive ssi disability review process and with substantially higher income and assets than the ssi program allows this expanded availability of medicaid coverage independent of ssi participation creates an opportunity to increase earnings and savings without jeopardizing health insurance coverage in this paper we use the natural experiments created by state decisions to expand medicaid to nondisabled nonelderly adults without dependent children to study the effect of decoupling medicaid eligibility and cash assistance using a difference in differences study design we collected data on the income eligibility limits enrollment caps and coverage characteristics of state medicaid expansions to childless adults from 2001 to 2013 we combine these data with the nationally representative american community survey to estimate the effects of state expansion on ssi participation we find relative declines in ssi participation of 0 17 percentage points on average after the introduction of medicaid coverage for childless adults a 7 relative decrease this finding suggests the potential for small but important efficiency gains from separating ssi and medicaid eligibility

incentive regulation and productive efficiency in the u s telecommunications industry this study evaluates the effect of incentive regulation on the productivity of u s local exchange carriers between 1988 and 1993 introducing pure price cap schemes has a strong and positive but lagged effect on technical efficiency where price cap schemes operate in conjunction with an earnings sharing scheme there is immediate effect on technical efficiency but the impact is less strong than the effect of a pure price caps scheme where only an earnings sharing scheme operates its effect is detrimental to technical efficiency weaker though broadly positive results are obtained as to the effect of incentive regulation on scale efficiency copyright 1997 by university of chicago press

intertemporal price cap regulation under uncertainty this paper examines the intertemporal price cap regulation of a firm that has market power under uncertainty the unconstrained firm waits longer before investing or adding to capacity and as a corollary enjoys higher prices over time than would be observed in an equivalent competitive industry in the certainty case the imposition of an inter temporal price cap can be used to realise the competitive market solution by contrast under uncertainty it cannot even if the price cap is optimally chosen under uncertainty the monopoly firm will generally a under invest and b impose quantity rationing on its customers

real flexibility and financial structure an empirical analysis i examine the empirical relation between real flexibility and financial structure i test whether real flexibility increases debt capacity by lowering default risk and making assets more marketable or decreases debt capacity by facilitating risk shifting and asset substitution i measure real flexibility as the sensitivity of marginal production and investment decisions to variations in the economic environment i find that financial leverage is negatively related to production flexibility but positively related to investment flexibility this split in results suggests that although asset substitution facilitated by investment flexibility can be prevented contractually risk shifting facilitated by production flexibility is intractable copyright 2003 oxford university press

investment under uncertainty and policy change in this paper the impact of a policy change on the investment behavior of the firm is studied in an incomplete information setting the policy change occurs when a stochastic process describing the state of the economic environment reaches a certain trigger the firm has incomplete information about the trigger and knows only its probability distribution consequently both the firm s conjecture concerning the trigger value as well as the precision of this conjecture serve as input parameters we derive the optimal investment rule maximizing the value of the firm and show that the impact of the trigger value uncertainty on the optimal investment threshold is non monotonic the threshold decreases with uncertainty for its low levels while the reverse is true if uncertainty is high furthermore we provide results concerning the valuation of the firm s investment opportunity and present some policy implications

on the investment uncertainty relationship in a real options model abstract it appears to be widely accepted in the real options literature that an increase in uncertainty should have an inhibiting effect on investment our article demonstrates that the notion of a negative uncertainty investment relationship is not always correct we show that in certain situations an increase in uncertainty can actually increase the probability of investing and thereby have a positive impact on investment

the dynamics of performance volatility and firm valuation we construct a model to illustrate the dynamics of cash flow volatility cfv and firm valuation as a firm progressively invests in its growth opportunities its book value increases and catches up with its market value reducing the valuation multiple q cfv decreases because of the diversification effect of investing in more market segments we document a positive cfv q association which varies with firm size investment opportunities and the correlation across market segments empirical findings strongly support the model s predictions and are robust to alternative explanations offered by extant studies on firm growth volatility and valuation

asset retirement with infinitely repeated alternative replacements harvest age and species choice in forestry abstract at what age should productive assets be retired how should replacements be chosen when they differ in their uncertain ability to generate future incomes as a particular version of that problem we study the tree harvesting decision with two possible replacement species whose values as timber are stochastic and whose growth functions are deterministic in the single rotation wicksell problem starting with a bare piece of land an empty shop it is optimal to choose and plant one species immediately if its current value is sufficiently high relative to that of the other species the alternative equipment however if the species are insufficiently price differentiated it is preferable to leave the land vacant the shop empty despite the opportunity cost of doing so in the repeated version of the problem it is never optimal to leave the land bare provided the cost of replacement is null furthermore the optimal harvest tree retirement age not only depends on the price and current productivity of the trees in place but also on the price and productivity of the other species because it may replace the current one the harvest age reaches a peak at some critical threshold of the relative price that signals the necessity to switch to the alternative species indeed this is when the opportunity cost of choosing one alternative replacement over the other is the highest the land value and also the value of the firm is similar to an american option with free boundary infinite expiry period and endogenous payoff the paper highlights the opportunity cost of alternative replacement options and the central role of their volatility in both asset retirement and replacement choice decisions all results are derived analytically a numerical treatment by the penalty method completes the resolution

with a little help from my friends cross subsidy and installed base quality in the u s telecommunications industry abstract this article examines the effect of the cross subsidization process which is a key institutional mechanism in the telecommunications sector generally on enhancing the quality of the installed base of telecommunications infrastructure in the united states fiber optic and digital technology usage levels within local exchange carriers in the united states are used to capture installed base quality the results show that local exchange sector cross subsidization has a positive effect on new technology deployed in the installed base regulatory influences are also controlled for and the introduction of pure price cap schemes is shown to positively affect new technology quality where price cap schemes are introduced in conjunction with a mixed earnings sharing scheme or where only an earnings sharing scheme is introduced then the effect on new technology usage is much more mixed

renewing assets with uncertain revenues and operating costs we study optimal replacement and abandonment decisions for real assets when both revenues and costs are uncertain and deteriorate with age we develop an implicit representation of the renewal boundary as the solution to a set of simultaneous equations this quasi analytical method has the merit of computational ease and transparency we show that the correlation between revenues and operating costs has a significant influence on the renewal boundary and that the increase in revenue immediately following a renewal has a greater relative influence on the boundary than either operating cost or renewal cost the quasi analytical method is sufficiently flexible to deal with other real option models involving 2 variables

the regulation of multiproduct firms part i theory abstract this paper develops a normative model of the regulation of a multiproduct firm with private information about its technology and cost reducing activity it first characterizes the optimal regulatory scheme and illustrates it through examples it then derives necessary and sufficient conditions for the pricing incentive dichotomy to hold i e conditions under which the cost reimbursement rule but not pricing is used to provide incentives last the paper studies the regulation of the multiproduct firm in a general equilibrium framework both to assess the validity of the partial equilibrium approach and to formalize the notion of taxation by regulation

innovation and imitation in an asymmetrically regulated industry abstract we model a game of innovation and imitation between a regulated firm and an unregulated firm although regulation may slow the industry wide pace of innovation it does not necessarily do so in fact by weakening the regulated firm s incentive to imitate a rival s successful new technology regulation may make the rival s innovation profitable thereby accelerating innovation by extension giving the regulated firm stronger incentives may backfire by producing either excessive or insufficient innovation these negative outcomes are more likely the greater is the cost reducing potential offered by the new technology

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

interactions of corporate financing and investment decisions a dynamic framework this article analyzes the interaction between a firm s dynamic investment operating and financing decisions in a model with operating adjustment and recapitalization costs using numerical analysis we solve the model for cases that highlight interaction effects we find that higher production flexibility due to lower costs of shutting down and reopening a production facility enhances the firm s debt capacity thereby increasing the net tax shield value of debt financing while higher financial flexibility resulting from lower recapitalization costs has a similar effect production flexibility and financial flexibility are to some extent substitutes we find that the impact of debt financing on the firm s investment and operating decisions is economically insignificant

the welfare impacts of discriminatory price tariffs this paper looks at the use of asymmetric tariffs as a regulatory instrument we use a monopolistic market setup with two markets and we introduce price controls in one of the two the purpose of the regulator is to maximise consumer welfare through this price discriminatory practice we consider cases where the welfare of the consumers in the two markets is weighted equally and cases where it is not in some cases we allow for the two markets to be linked through a monopsonistic input market the paper focuses on the welfare implications of this regulatory approach with the firm operating under a profit restriction results suggest that having only one price controlled market is in certain cases a good option from a welfare perspective

conditional investment policy under uncertainty and irreversibility abstract an irreversible investment decision such as fixing a defective equipment is considered which in turn is conditional on the profitability and expected life of the entire equipment given the sunk cost of fixing the fault the uncertain costs of waiting and the expected life of the entire equipment the problem is to find the optimal time to fix the fault to minimize the expected total discounted costs the optimal policy is obtained in the optimal stopping context using stochastic dynamic programming techniques and analyzed via the partial differential equation pde it is shown that increasing uncertainty over internal losses as a function of profits and decreasing life expectancy of the entire equipment can significantly increase the optimal stopping barrier

strategic sharing in regulatory regimes abstract a firm subject to price cap regulation pcr disciplines the regulator s choice of entry accommodation rule through a convex combination of earnings and effort sharing the first best level of cost reducing effort is not achieved in this model even under pure pcr

price quality and regulation an analysis of price capping and the reliability of electricity supply abstract this paper examines the relationship between price cap regulation and the reliability of supply of a private monopoly two situations are considered one in which reliability is excluded from the price cap and one in which it is included if reliability is excluded it is shown that there is a tendency for the firm to protect profits by lowering reliability when cost increases must be absorbed whereas if reliability is included then this tendency is eliminated however this inclusion creates an incentive for the firm to exploit the positive relationship between price and reliability when cost increases can be passed on but this problem can be controlled by reducing the exogenous weight applied to reliability in the price cap formula

repeated real options optimal investment behaviour and a good rule of thumb abstract this paper extends the standard investment under uncertainty set up with a single investment option to the case of infinitely repeated options analytical solutions are derived and it is shown that repeated options not only imply a smaller value of waiting than in the case of a single option but also that the optimal stopping rule is affected differently by changes in underlying parameters this is shown to allow for the use of a simple hurdle rate rule as a good and robust approximation to optimal behaviour when investment options are repeated something which is unlikely in the single option case

regulation asymmetric information and auditing this article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator by auditing at a cost however the regulator is assumed to be able to observe the realized cost of the firm if the regulator finds that the firm had misrepresented its costs at the time at which prices were set he can order a refund to consumers in the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the auditfinds that realized costs are lower than anticipated given the original report a separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision the auditing decision however depends on the price that was initially set the optimal auditing strategy is characterized and the nature of the welfare gains are identified the methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable

incentive regulatory policies the case of public transit systems in france we assess the empirical relevance of the new theory of regulation using a principal agent framework to study the regulatory schemes used in the french urban transport industry taking the current regulatory schemes as given the model of supply and demand provides estimates for the firms inefficiency the effort of managers and the cost of public funds it allows us to derive the first best and second best regulatory policies for each network and compare them with the actual situation in terms of welfare loss or gain fixed price policies lie between fully informed and uninformed second best schemes cost plus contracts are dominated by any type of second best contract from these results we may conjecture that fixed price contracts call for better informed regulators

a regulatory bargain for diversified enterprises abstract this paper examines an alternative to traditional rate of return regulation and price cap regulation for public utilities which serve both non competitive and competitive markets the alternative is a regulatory bargain in which the allowed economic profit for the firm is tied to the level of net economic benefits consumer surplus accruing to the customers in non competitive markets among other things this form of regulation is shown to lead to cost minimizing production efficient pricing in competitive and non competitive markets diversification into competitive markets if and only if there are economies of scope and protection of customers in non competitive markets from economic harm reduced consumer surplus if the firm does diversify

strategic pricing of grid access under partial price caps electricity distribution in england and wales abstract it is perceived in public debate that monopolistic network operators who are vertically integrated into competitively organised activities would raise excessive access charges to derail competition by newcomers economic reasoning however suggests that the level of access charges is at least in a simple setting irrelevant for the intensity of entry by newcomers in a setting where access charges are price cap regulated theoretical considerations and empirical findings for the case of electricity distribution in england and wales even suggest that inefficiently high access charges correspond with intense market entry efficiency concerns remain nonetheless if regulated by a practicable partial price cap the network operator may enforce monopolistic access charges in certain market segments access charges in other segments may be lowered strategically and may even be cross subsidised

disability insurance and health insurance reform evidence from massachusetts abstract as health insurance becomes available outside of the employment relationship as a result of the affordable care act aca the cost of applying for social security disability insurance ssdi potentially going without health insurance coverage during a waiting period totaling 29 months from disability onset will decline for many people with employer sponsored health insurance at the same time the value of ssdi and supplemental security income ssi participation will decline for individuals who otherwise lacked access to health insurance we study the 2006 massachusetts health insurance reform to estimate the potential effects of the aca on ssdi and ssi applications

the impact of health care reform on hospital and preventive care evidence from massachusetts in april 2006 massachusetts passed legislation aimed at achieving near universal health insurance coverage the key features of this legislation were a model for national health reform passed in march 2010 the reform gives us a novel opportunity to examine the impact of expansion to near universal coverage state wide among hospital discharges in massachusetts we find that the reform decreased uninsurance by 36 relative to its initial level and to other states reform affected utilization by decreasing length of stay the number of inpatient admissions originating from the emergency room and preventable admissions at the same time hospital cost growth did not increase

uncertainty real options and cost behavior evidence from washington state hospitals this study tests an implication of the real options theory of investment that uncertainty leads firms to prefer technologies with low fixed and high variable costs in 1983 a change in medicare reimbursement increased the uncertainty of revenues for hospitals using a sample of 831 departments in 59 washington state hospitals over the 1977 1994 period we find that the ratio of variable to total costs increased after 1983 this increase is not attributable to a gradual increase in the ratio over time we estimate a significant increase after 1983 even after controlling for a time trend further we find a greater increase in the variable to total cost ratio for hospitals that had higher percentages of medicare patients increasing our confidence in the conclusion that the change in cost behavior is attributable to medicare s change in reimbursement copyright university of chicago on behalf of the institute of professional accounting 2005

debt and communications technology diffusion retrospective evidence this study has evaluated the relationship between debt in the capital structure of firms and the dynamics of broadband and digital technology adoption in the united states based on a large dataset on local exchange carriers in the united states over a contemporary historical fourteen year period from 1988 to 2001 using treatment effects modeling the impact of debt in impacting the levels of firms broadband deployment has been found to be negative and significant the primary source of debt in the sector has been in the form of arm s length corporate bonds and the assumptions of the monitoring hypothesis associated with such debt that lenders in the face of information and collective actions problems might not be able to control managers and hence invest less in highly technology intensive situations are supported by the data additionally the data set has been split into separate sets for two periods one between 1988 and 1995 for the period before the telecommunications act of 1996 came into force and the other set between 1996 and 2001 and the results have stayed consistent a test of the coefficients between the two periods has shown that the negative impact of leverage on broadband deployment has become stronger after the introduction of competition in the sector and this has suggested that the change in the institutional logics between the two periods has been of material impact in influencing lenders perceptions

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

cost reductions cost padding and stock market prices the chilean experience with price cap regulation we study the chilean electricity distribution industry and find that costs the ratio of reported costs to revenues have fallen since price caps were introduced cost reductions are u shaped since 1989 strong initial cost reductions reverse every four years coinciding with regulatory reviews a possible explanation is that firms are behaving strategically we then use stock market data to complement our study we construct a measure of cumulative abnormal returns for regulated firms around their quarterly announcements and a measure of naive cost expectations which excludes any indication of the occurrence of review periods in general cost reports in excess of naive cost expectations have a negative effect on returns even after we control for company fixed effects the exception is cost surprises that happen during review periods which increase abnormal returns the estimated effects fall over time this is consistent with the hypothesis of strategic firms and that the regulatory regime translates these games into higher rates in a way that is not completely anticipated by the market more generally the results suggest there may be value in complementing regulatory procedures with stock market information

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

a dynamic it adoption model for the soho market pc generational decisions with technological expectations thesmall office home office soho professionals comprise the fastest growing segment in the labor force today typically being a one person business based at home soho owners mostly rely on office information technology to single handedly run their entire operation despite the segment s ostensibly growing dependence and influence on the information technology it industry still very little is known about the dynamics between soho and it products with the purpose of addressing this void we investigate the soho professionals adoption patterns of multigenerational it products accordingly we develop and empirically estimate an individual soho levelinitial andrepeat purchase logit model that captures the procurement patterns for successive generations of technological products namely the pc category specifically we find that soho professionals procurement choices are influenced by a number of salient dimensions i e income performance price interpurchase time network externalities furthermore some soho owners are found to have a preference for a future expected generation over a currently available one which is explained via their business dispositions i e technology orientation result orientation search orientation toward accepting technological incertitude

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

price cap regulation problems and solutions the problems of price cap regulation include the transformation from rate of return regulation the adoption of a price cap formula cross subsidization and the relationship between regulation and competition the experience of price cap regulation reveals that it does not protect monopoly customers and it allows utilities to engage in cross subsidization these results imply that the regulator must periodically review price cap results to realign prices with the cost of service and to ensure that a level playing field that would nurture competition develops in every market

asymmetric information incentives and price cap regulation a regulatory incentive mechanism is presented in which the regulated firm has superior information about both cost and demand compared to the regulator the mechanism leads to truthful revelation of the demand function and extracts all rents due to private demand information in a nondistorting way the scheme assumes that the regulator can observe lagged expenditures by the firm this mechanism leads to efficient pricing operating and investment behavior by the firm finally it is shown that the mechanism is closely related to recent proposals for price cap regulation and that under certain assumptions simple modifications of these proposals will lead to the mechanisms discussed herein

contributions of neoclassical economics to public utili iy analysis neoclassical economics the dominant economics paradigm has influenced and been influenced by developments in regulated industries we identify major theoretical and empirical accomplishments discuss the impactofthese accomplishmentsonpolicydevelopment andlist the channelsthrough which the impacts are madepossible we then discuss regulatorypolitics lack ofresearchperspective an overly narrow focus on economic efficiency and the academic profession as factors limiting the impact of neoclassical economics on public policy

good regulatory regimes assuming simple functional forms numerical methods are used to analyze linear regulatory rules that include cost plus and price cap regimes regulators are assumed to observe actual cost but not the disutility of cost reduction and are assumed unable to impose taxes or make transfers best linear regimes depend importantly on the level and form of uncertainty the regulatory objective function and the firm profitability constraint under uncertainty regimes in which price depends in part on actual cost generally substantially outperform pure price caps particularly in terms of consumers surplus

the regulation of privatized monopolies in the united kingdom this article examines the experience in the united kingdom with the regulation of privatized monopolies its conclusions are 1 that there are significant differences between rpi x or price cap and u s rate of return regulation which provides greater scope for bargaining in the former system 2 that u k regulators have taken seriously their duty to promote competition but that the existing economic literature is of limited help in this task 3 that price regulation is likely to be more effective where technology is changing slowly and or where technology is changing rapidly and 4 that the case for rpi x price cap rather than rate of return regulation is strongest in telecommunications gas supply and electricity supply and least strong in gas and electricity transmission grids

waiting to invest investment and uncertainty the textbook analysis that accepts all projections with positive net present values as positive is quite generally wrong the ability to delay a project means that almost every project competes with itself postponed with uncertain interest rates even the simplest of projects has an option value the effect of interest rate uncertainty on the optimal delay of investment is sizable this implies that the rate of aggregate investment will depend on both the level of the real interest rate and the degree of interest rate uncertainty furthermore it is not necessarily true that investment rises with a fall in interest rates copyright 1992 by university of chicago press

on the optimal structure of government subsidies for enterprise zones and other locational development programs abstract government locational development programs often reward businesses for decisions they would have made or that are going to be quickly reversed this paper presents a model to determine the amount and structure of government locational subsidies that minimize this problem we model the firm s decision to switch locations as an option whose value depends on stochastic operating costs the costs to switch locations and subsidies offered by the government the government maximizes the expected benefit from the operation of the firm within its preferred location by choosing a subsidy package that explicitly and endogenously recognizes the firm s switching option

operational asset replacement strategy a real options approach abstract this paper analyses the problem of replacement by investigating the optimal moment of investment replacement in a given tax environment with a given depreciation policy an operation and maintenance cost minimization model based on the definition of equivalent annual cost is applied to a real options paradigm the developed methodology allows for an innovative evaluation of the flexibility of replacement process analysis a new two factor evaluation function is introduced to quantify decisions on asset replacement under a unique cycle environment this study improves upon previous findings in the literature as it accounts for autonomous salvage value processes based on partial differential equations this model achieves a general analytical solution and particular numerical solution the results differ significantly from those observed in one factor models by showing evidence of over evaluation in optimal levels of replacement and by confirming suspicions that different types of uncertainties produce non monotonous effects on the optimal replacement level the scientific contribution of this study lies in new and stronger approaches to equivalent annual cost literature supplying an algorithm for operation and maintenance cost minimization that is conditioned by autonomous salvage value this study also contributes to the real options literature by developing a two factor model with brownian processes applied to asset replacement

investment under uncertainty the case of replacement investment decisions we analyze the determinants of replacement investment decisions in a contingent claims model with maintenance and operation cost uncertainty we find that the optimal time between replacements is increasing in the volatility of cost the purchase price of a new asset and the corporate tax rate and is decreasing in the systematic risk of cost the salvage value of the asset and the investment tax credit the optimal time between replacements can either increase or decrease with an increase in the depreciation rate extensions of the model to examine the effects of technological and tax policy uncertainty on replacement investment decisions give intuitive but striking results uncertainty about the arrival of a technological innovation that would decrease maintenance and operation cost results in a significant decrease in replacement investment uncertainty in a tax law change that would encourage investment decreases current investment and uncertainty in a tax law change that would discourage investment increases current investment

machine replacement under evolving deterministic and stochastic costs the infinite horizon cost minimization and the real option stopping problem are used to analyze serial replacement of a single asset under improving technology it is shown that both techniques produce the same equal life replacement policy when exponential technological improvements affect the operating cost and new asset cost in the same way next this result is extended to the stopping problem under evolving stochastic costs under general improving technology the expected asset lifetimes appear to be different for sequential replacement cycles and depend on the future cost evolution numeric experiments are provided and managerial implications of the obtained outcomes are discussed

disability benefit take up and local labor market conditions exploiting county level variation in oil producing areas from shocks to world oil and gas prices we study how local labor market conditions affect disability take up we extend well known previous work using a similar research design by analyzing a different price shock a larger more representative set of labor markets and a more recent period marked by skyrocketing disability payments our estimated elasticity for ssdi payments with respect to earnings of 0 29 is surprisingly similar to earlier findings our preferred ssi elasticity estimate of 0 16 is smaller than previous findings but we show that ssi programmatic changes explain most of the difference jel codes j0 h0

investment tax incentives and frequent tax reforms despite the frequency of tax changes and their potential importance to investors almost all of the analysis of tax based investment incentives assumes investors never anticipate any tax changes we depart from this approach by analyzing the historical pattern of u s corporate investment incentives over the period 1953 86 incorporating the feature of investor awareness that the tax code may change our analysis incorporates a predictive equation for future tax variables into a model of optimal investment subject to adjustment costs and uncertainty we find that expectations of future tax changes significantly affect the incentive to invest only if adjustment costs are low in this case the incentive to invest in 1986 was strong as investors are estimated to have anticipated the coming reduction in investment incentives this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

dynamics of price regulation we study the dynamics of price regulation for an industry adjusting to exogenous technological progress first we characterize the optimal capacity path and replacement cycles in a neoclassical investment model second we show that naive rate ofreturn regulation which ignores components of economic depreciation eventually results in a deficient level of capacity due to excessively high retail prices burdened by the need to recover the underdepreciated costs of historical investments third we explain how price cap regulation leads to more efficient capital replacement decisions compared to naive rate of return regulation and we show how finite price cap horizons distort capital replacement finally we interpret recent regulatory reforms in telecommunications markets

the effect of tax depreciation on the stochastic replacement policy abstract the optimal replacement policy for an asset subject to a stochastic deteriorating operating cost is determined for three different tax depreciation schedules and a known re investment cost as the solution to a two factor model using a quasi analytical method we find that tax depreciation exerts a critical influence over the replacement policy by lowering the operating cost thresholds although typically a decline in the corporate tax rate increase in any initial capital allowance or decrease in the depreciation lifetime increase in depreciation rate results in a lower operating cost threshold which justifies replacing older equipment these results are not universal and indeed for younger age assets the result may be the opposite an accelerating depreciation schedule may incentivize early replacement in a deterministic context but not necessarily for an environment of uncertainty

capital renewal as a real option we consider the timing of replacement of obsolete subsystems within an extensive complex infrastructure such replacement action known as capital renewal must balance uncertainty about future profitability against uncertainty about future renewal costs treating renewal investments as real options we derive an optimal solution to the infinite horizon version of this problem and determine the total present value of an institution s capital renewal options we investigate the sensitivity of the infinite horizon solution to variations in key problem parameters and highlight the system scenarios in which timely renewal activity is most profitable for finite horizon renewal planning we show that our solution performs better than a policy of constant periodic renewals if more than two renewal cycles are completed

investments of uncertain cost abstract this paper examines irreversible investment decisions when projects take time to complete and are subject to two types of cost uncertainty the first is technical uncertainty i e uncertainty over the physical difficulty of completing a project which is only resolved as the investment proceeds the second is input cost uncertainty i e uncertainty over the prices of construction inputs or over government regulations affecting construction costs which is external to the firm these two types of uncertainty have very different effects on the investment decision a simple investment rule is derived that maximizes firm value and is used to analyze the decision to start or continue building a nuclear power plant during the 1980s

the paradox effects of uncertainty and flexibility on investment in renewables under governmental support abstract given that companies have the flexibility to decide about size and timing of a renewable electricity investment the existence of four paradox effects is proven only the type but not the amount of governmental support has an influence on the optimal capacity of a renewable electricity generating system a decrease of governmental support over time may result in higher capacities of renewables installed on an industry level at least on the short term likewise higher uncertainty may encourage an expansion of these capacities in contrast technological progress may hamper the expansion of capacities finally these four paradox effects are exemplified in a germany based case study regarding a photovoltaic project

strategic nonlinear pricing under price cap regulation we examine profit maximizing nonlinear pricing under a stylized version of the fcc s price cap plan for at t whereby the firm s average revenue in each period is constrained not to exceed some fixed level when average revenue in each period is calculated as the ratio of total revenue in that period to output in the preceding period as in the fcc s plan for at t incentives are created for the firm to engage in strategic nonlinear pricing these incentives can lower both consumers surplus and total surplus under price cap regulation we propose alternative implementations of price cap regulation that eliminate these incentives for strategic pricing we also examine whether current profits should influence future revisions of the cap we show that small amounts of such linkage can enhance total surplus due to pricing distortions that arise under price cap regulation

the bell system divestiture deregulation and the efficiency of the operating companies abstract a variety of casual evidence has been offered in measurement of the efficiencies and inefficiencies thought to flow from the bell system divestiture and accompanying state regulatory reforms to address several questions in this regard we estimate a regulated cost function for local exchange services using panel data on the divested bell operating companies bocs divestiture and regulatory reform are found to have produced significant efficiencies as of 1993 saving about 20 percent in cost relative to what would have obtained in the absence of these events more specifically to 1993 the divestiture yielded savings of 115 4 billion and state level regulatory reform yielded a slightly smaller 96 7 billion in savings both measured in 1993 dollars output augmentation factor bias and allowed rate of return effects contribute in identified ways to these overall results

welfare effects of price discrimination by a regulated monopolist should a multiproduct monopolist whose average price is capped by regulation be allowed to engage in third degree price discrimination if the cap applies to a price index with weights proportional to demands at uniform prices then price discrimination benefits consumers as well as the firm but if perhaps more realistically it is the firm s average revenue that is capped then consumers prefer uniform pricing in this case total output is higher when discrimination is allowed which increases welfare but marginal utilities differ across markets which is inefficient and the overall effect is ambiguous a small amount of discrimination is desirable however it is better not to allow price discrimination if the price cap is close to the level of marginal cost the consequences of tightening the price cap when discrimination is allowed are also examined

diversification incentives under price based and cost based regulation this article considers two schemes of regulationforfirms that serve both monopoly markets and markets subjected to substantial competition the first form cost based regulation combines elements of rate of return regulation on monopoly markets with filly distributed cost pricing much like the form of regulation currently in place in the domestic telephone industry the secondform price based regulation would establish rate caps on noncompetitive services and allow the firm to enter into competitive markets and charge whatever prices it might like in those markets models of both forms of regulation are developed and analyzed with respect to incentives for cost misreporting choice of technology cost reducing innovation choices of prices and output levels and diversification into competitive markets

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

industry input in policy making evidence from medicare in setting prices for physician services medicare solicits input from a committee that evaluates proposals from industry the committee itself comprises members from industry we investigate whether this arrangement leads to regulatory capture with prices biased toward industry interests we find that increasing a measure of affiliation between the committee and proposers by one standard deviation increases prices by 10 we then evaluate whether employing a biased committee as an intermediary may nonetheless be desirable if greater affiliation allows the committee to extract information needed for regulation we find industry proposers more affiliated with the committee produce less hard evidence in their proposals however on soft information we find evidence of a trade off private insurers set prices that more closely track medicare prices generated under higher affiliation

low powered vs high powered incentives evidence from german electricity networks abstract we propose a difference in differences approach to estimating the impact of incentives on cost reduction in the context of german electricity networks when subject to a lower powered regulation mechanism relatively more efficient operators pile up more costs in the year used to determine future prices this pattern is consistent with the idea that incentives matter higher powered incentives lead to cost reduction the results are also consistent with an equilibrium where more efficient firms pool with less efficient ones under the threat of ratcheting