Dilution costs and utility regulation under asymmetric information

Noe, Thomas and Kale, Jayant R (1995) Dilution costs and utility regulation under asymmetric information. Journal of Regulatory Economics, 7 (2). pp. 177-197.


This article addresses the problem faced by a regulated natural monopolist who must raise outside funds to finance socially desirable projects. We demonstrate that fair rate of return utility price regulation will lead to underinvestment incentives in the presence of asymmetric information between the firm and the capital markets regarding the firm's assets and future costs. This problem is especially severe when financing choice is restricted to equity. Underinvestment can be either completely eliminated by adjusting the allowed rate of return above the fair rate or reduced by switching to debt finance.

Item Type: Article
Keywords: Price regulation; Capital markets; Monopolies; finance
Subject(s): Finance
Date Deposited: 26 Feb 2012 15:53
Last Modified: 02 Mar 2017 10:51
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/2637

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