Optimal Regulation of Lumpy Investments

When a monopolist has discretion over the timing of infrastructure investments, regulation of post-investment prices interferes with incentivizing socially optimal investment timing. In a model of regulated lumpy investment under uncertainty, we study regulation when the regulator can condition price caps on investment timing. We analyse optimal regulation when there is asymmetric information on investment costs and regulation has to respect a budget constraint. We show that optimal regulation involves a price cap that decreases as a function of the monopolist's chosen investment time.