The capital structure and investment of regulated firms under alternative regulatory regimes

This paper explains how regulated firms choose their capital structure and examines the effects of this choice on investment and on regulated prices. It is shown that in equilibrium, firms have an optimal debt level and that given this debt level, the regulated price is set high enough to ensure that firms never become financially distressed. The analysis of the equilibrium yields testable hypotheses concerning the effects of changes in cost parameters and in the regulatory climate on the equilibrium investment level, capital structure, and regulated price. The analysis also shows that a regulatory restriction on the ability of the firm to issue securities may have an adverse effect on investment and consequently may harm consumers.     

Inventory investment,investment and employment with uncertain demand

In that paper, a model of the optimal behaviour of firms with respect to the determination of capacity employment, investment and inventories is presented and estimated. Firms face an infinite horizon and an uncertain expected demand. The optimality conditions are derived, linearized and integrated. After having defined the stable optimal paths, one can proceed to the estimation of the model and to various simulations.     

Irreversible investment with uncertainty and strategic behavior

The paper provides a model of technology adoption in the case where adopting alone is more expensive than adopting when others have already done so (network effect). In addition, if each agent gains at the expense of his rivals, he may also have an incentive for ‘preemptive adoption’. We deal with these two issues in a dynamic programing framework, where adoption is seen as a strategic switching time decision problem for agents facing an ongoing stochastic operating benefit plus sunken investment costs. The model defines the option value of investing for a continuous time stochastic game. In the case of network benefits alone, agents follow a stationary bandwagon strategy, representing the effect caused by a war of attrition. Yet, as network benefits reduce adoption costs after an agent has switched, rivals may follow suit. In the opposite case, where going first gives the innovator a higher payoff the bandwagon rule is turned over and the option value of investing first may be lower than that of going second. This gives rise to sequential adoption.     

Monopoly and demand uncertainty

We develop a formal framework to analyse a monopoly’s problem when demand is determined by a Poisson-distribution and the valuations of the buyers are draws from a common distribution. The buyers have unit demand, and the good in question is discrete. The monopoly has to make its quantity and pricing decisions before demand is realised. We determine sufficient conditions for the monopoly’s pricing decision to be unique, and we demonstrate the difference to the planner’s problem by numerical examples. We also study an economy with a fixed number of buyers assuming that the valuations are draws from the uniform distribution. When the economy grows in the limit one recovers the standard case of a monopoly with linear demand and constant marginal costs.     

Mutually exclusive investment with technical uncertainty

A firm, which faces technical uncertainty as in Pindyck (1993) can choose between two mutually exclusive investment projects, Projects 1 and 2. The added option to exercise Project 2 makes the firm less likely to exercise Project 1. An increase in the degree of technical uncertainty, the investment rate or the investment value upon completion for Project 2 encourages the firm to exercise Project 2 by increasing the trigger level of the expected cost of Project 2. This, however, ambiguously affects the firm's incentive to exercise Project 1, as the firm would rather implement Project 1 (2) in a region where the expected cost of Project 2 is relatively high (low).     

Technical efficiency under alternative environmental regulatory regimes: The case of Dutch horticulture

We consider the performance of small and medium sized enterprises in Dutch horticulture under different environmental policy regimes across time. We address the question whether technical performance differs under these alternative regulatory regimes to test Porter's hypothesis that stricter environmental regulation reduces technical inefficiency. For this purpose, we use a stochastic production frontier framework allowing for inclusion of policy variables to measure the effect of alternative environmental policy regimes on firms' performance. The main result is that stricter environmental policy regimes have indeed reduced technical inefficiencies in Dutch horticulture. The estimation results indicate amongst others that the 1997 agreement on energy, nutrient and pesticides use enhances technical efficiency. Firms under the strict environmental policy regime are found to be more technically efficient than those under a lax regime, thereby supporting the claims by Porter and Van der Linde (Porter, M., Van der Linde, C., 1995. Green and Competitive: Ending the stalemate. Harvard Business Review 73, pp. 120-137) concerning Dutch horticulture.     

Large market games with demand uncertainty

We consider a market game with a continuum of consumers, where the measure of each type is stochastic. Nature selects the set of active consumers, who make bids and offers on ?−1 spot market trading posts. Existence of type-symmetric Nash equilibrium is proven. When facing price uncertainty, best responses are unique, and a Nash equilibrium to the sell-all game is typically not a Nash equilibrium to the original game. Under plausible circumstances, consumers strictly prefer to be on one side of the market.     

Preemptive investment game with alternative projects

This paper investigates a duopoly with two alternative investment projects. We examine a situation in which a firm cannot invest in any project that has been taken by the rival firm. The first mover's advantage in project choice leads to an equilibrium quite different from that in previous studies. Specifically, we show that in equilibrium, the investment time and the option value are between those in a duopoly with one project and a monopoly with one project. Moreover, we show that a high correlation between project values, unlike in a monopoly with two projects, plays a positive role in mitigating preemptive competition. The results complement the literature of real options games and of max-options and entail new empirical implications.     

Irreversible investment and Knightian uncertainty

When firms make a decision about irreversible investment, they may not have complete confidence about their perceived probability measure describing future uncertainty. They may think other probability measures perturbed from the original one are also possible. Such uncertainty, characterized by not a single probability measure but a set of probability measures, is called “Knightian uncertainty.” The effect of Knightian uncertainty on the value of irreversible investment opportunity is shown to be drastically different from that of traditional uncertainty in the form of risk. Specifically, an increase in Knightian uncertainty decreases the value of investment opportunity while an increase in risk increases it.     

Exports,investment and policy uncertainty

Building on a literature that underscores the value of delaying investment in the face of uncertainty, we study how policy uncertainty in 18 large economies affects exports to these economies. We decompose aggregate bilateral trade flows from 1995 to 2013 into intensive and extensive margin components and employ a gravity specification to assess the impact of policy uncertainty on each margin separately. Consistent with theory, increases in policy uncertainty decrease both trade values and the extensive margin but, if anything, increase the intensive margin. In further tests, we use various proxies for sunk export costs and demonstrate that the effects of policy uncertainty are more pronounced where sunk costs are higher.     

Political uncertainty and labour investment efficiency

ABSTRACT

We examine the impact of political uncertainty on the labour investment efficiency (LIE) of a firm. Using a sample of Chinese firms, we test the market discipline and managerial entrenchment hypotheses. Our findings suggest that political uncertainty adversely affects LIE. The results are consistent with the managerial entrenchment hypothesis. That is, firms hire more labour in a period of increased information asymmetry due to the political uncertainty, which deteriorates LIE. Our findings are robust to a battery of alternative measures of LIE and estimation methods. We conduct several additional analyses and document that the adverse impact of political uncertainty is stronger when the newly appointed government official is older, the firm is state-owned, the firm belongs to a politically sensitive industry or the firm operates in locations with stringent labour protection. By contrast, when the firm locates in a region with weak Chinese government intervention or after President Xi Jinping’s anti-corruption campaign, the adverse impact of political uncertainty on LIE is less pronounced. Last, we document that after hiring more labour, firms receive tangible and intangible benefits in terms of receiving more loans, collect more government subsidies, and able to re-establish some political connection but at the cost of lower performance.     

Return-to-normal expectations and investment demand functions

This paper analyzes an adjustment-cost model of optimal investment behavior under return-to-normal expectations. The model yields two implications that are of interest for the interpretation of empirical work on investment behavior. One is that the model rationalizes the proposition that only permanent, as distinct from temporary, changes in expected prices will have a strong sustained effect on investment. A second is that the model provides an explanation for the humped-shaped nature of the lag distributions that have been estimated in the empirical literature.     

The optimal minimum wage with regulatory uncertainty

For two different regulatory standards, we examine the optimal minimum wage in a competitive labor market when the government is uncertain about supply and demand. Solutions are related to underlying supply and demand conditions, and to the extent of uncertainty and of rationing efficiency. With expected earnings maximization, greater uncertainty widens the range of parameter values for which a minimum wage should be set. With expected worker surplus maximization and sufficiently efficient rationing, a minimum wage should always be set. However, in both cases regulatory uncertainty may require a low minimum wage that may not bind in equilibrium.     

Long-run investment under uncertain demand

In the literature investigating the impact of uncertainty on short-run and long-run investment, most authors have used a log linear profit function. This functional form has been generally considered a reasonable approximation for a more general one and has the advantage of providing closed form solutions for both short-run investment rule and long-run rate of capital accumulation. In this paper, we consider the profit function for the case of a monopolistic firm facing a linear demand function with additive shocks. Under this assumption, analytical solutions, for both short-run investment rule and long-run rate of capital accumulation, are not available. We then 1) propose an analytical approximation of the short-run investment rule and 2) show how such approximation can be used in order to derive the corresponding i) steady-state distribution of the optimal stock of capital and ii) the long-run average rate of capital accumulation. Finally, we compare the long-run rates of capital accumulation calculated under both profit function specifications. We find that, within a plausible range of parameter values, the two rates are significantly different. Hence, we conclude that the choice of a log linear functional form has a non-trivial impact on the magnitude of the long run rate of capital accumulation.     

Superior regulatory regimes in theory and practice

A substantial body of recent research finds thatprice-cap regulation is superior tocost-based regulation in that many of the distortions associated with the latter are reduced or eliminated entirely. We prove that the hybrid application ofcost-based and price-cap regulation that characterizes current regulatory practice in the United States telecommunications industry may generate qualitative distortions greater in magnitude than those realized undercost-based regulation. It follows thatprice-based regulation in practice may be welfare-inferior tocost-based regulation. The analysis further reveals that the firm subject to this modified form ofprice-based regulation may have incentives to engage in pure waste.     

Polarisation, uncertainty and public investment failure

In a political economy model, the effect of political polarisation on a government's intertemporal choice between redistribution and public investment is shown to be similar to the effect of political uncertainty. Moreover, polarisation and uncertainty reinforce one another in their impact on public underinvestment and may ultimately lead to no investment at all.     

Economic uncertainty,monetary uncertainty and the Korean demand for money

Economic uncertainty and monetary uncertainty are said to affect public’s holding of money in either direction. In this paper, we consider the Korean demand for money, and after including two GARCH-based measures of output uncertainty and monetary uncertainty, we show that both measures exert significant effects on the demand for money in Korea in the short run. However, only the adverse effects of output uncertainty lasts into the long run. Indeed, including the two uncertainty measures yield a stable demand for money in Korea.     

The power of regulatory regimes reexamined

Journal of Regulatory Economics - The literature finds that pure price cap regulation (PCR) is a high-powered regulatory regime because it elicits the first-best level of cost-reducing effort....     

The value of information in oligopoly with demand uncertainty

This paper discusses the value of information in supermodular and submodular games, using a simple duopoly model where the level of demand is uncertain. It is shown that the value of information issuperadditive (resp.,subadditive) between players if the game issupermodular (resp.,submodular). For example, in a Bertrand (resp., Cournot) market with (possibly imperfect) substitute products, one firm's information acquisition increases (resp., decreases) the other firm's incentive to acquire the same information. Furthermore, when the game is either supermodular or submodular, the value of information is higher when the player isexpected to be informed according to the opponent's belief than when the player is expected to be uninformed; this result is reversed when the game has asymmetric modularity (i.e., one player's action is substitutional to the other's, and the latter's action is complemental to the former's). These qualitative observations have a potential to be applied to a larger class of games with uncertainty where payoffs are smooth (e.g., twice continuously differentiable) in actions and states.     

Strategic technology choice in regulated markets with demand uncertainty

This paper presents a simple model of a non-competitive market with demand uncertainty in which firms can choose their technology of production. Technology is characterised by two parameters: capacity and flexibility. The first has a strong commitment value while flexibility is needed to face uncertainty. Lack of competition requires active regulation to ensure that the price is not set at excessive level. When choosing their technology, firms take into account not only the effects of this choice on the opponent(s) but also the effect on the regulated price. In this framework, and because of regulation, firms have an incentive to strategically manipulate their cost (cost padding). This causes monopoly regulation aiming at improving allocative efficiency to be ineffective. In fact, by “tying its hand” to a low level of capacity, the monopolistic firm is able to get round the constraint imposed by the regulator. Increasing the number of firms in the market may restore regulation effectiveness. The reason is that if demand is sufficiently volatile, then firms strategically choose flexible techniques and this effect dominates over the incentive to manipulate costs in order to escape regulation. In this case, regulation is effective precisely because cost padding is hampered by firms’ non-cooperative behaviour.