Frameworks for analyzing the effects of risk and environmental regulations on productivity

Abstract

Three separate effects of regulatory policies on enterprise decisions can be distinguished. First, increased regulatory penalties will diminish output and profits in static models or, equivalently, in multiperiod models in which investments are completely reversible, as is well known. Second, if investment commitments are irreversible, there will be an additional effect of a known schedule of changes in the regulatory policy, which will depress output even further. Finally, the addition of uncertainty with regard to regulatory policy produces a third effect resulting in expected opportunity losses for firms. Both output and quality investments will be depressed by regulatory policy lotteries. Regulations influence current enterprise decisions not only through their current level, but through their expected future level and the degree of uncertainty regarding these future regulatory policies. 9 references, 1 figure.