Research Details

Abstract

We examine the equilibrium price, investment, and capital structure of a regulated firm using a sequential model of regulation. We show that the firm's capital structure has a significant effect on the regulated price. Consequently, the firm chooses its equity and debt strategically to affect the outcome of the regulatory process. In equilibrium, the firm issues a positive amount of debt and the likelihood of bankruptcy is positive. Debt raises the regulated price, thus mitigating regulatory opportunism. However, underinvestment due to lack of regulatory commitment to prices persists in equilibrium.

Type

Article

Author(s)

Yossef Spiegel, Daniel Spulber

Date Published

1994

Citations

Spiegel, Yossef, and Daniel Spulber. 1994. The Capital Structure of a Regulated Firm. RAND Journal of Economics.(3): 424-440.