Investment timing and scale of operation under private information about demand forecast

JEL classification: D6; D8; L5We study the regulatory policy of a monopoly facing stochastic demand for the service it provides after performing an irreversible investment in infrastructure. We find that under uncertainty, bundling the decisions about investment timing and scale of operation is beneficial. When public-private co-operation is necessary to cover the investment cost and accumulation of public funds is costly, waiting longer is traded-off against rationing consumers. As soon as informational asymmetries about traffic forecast appear, the regulator enlarges the waiting period even more but sets the quantity closer to the to the first best level, as compared to the second best environment. (Author's abstract