The Distributional Efficiency of Alternative Regulatory Regimes: A Real Option Approach

This paper studies the effects of regulatory constraints on firm's irreversible investment decisions. The RPI–x rule is compared to a profit sharing rule, which increases the x factor in case profits go beyond a given level.When the firm has an option to delay investment, these rules have the same impact on investment choices. As profit sharing has a greater ability to extract rents, however, it is more efficient than the RPI–x rule.