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Strategic Firm Behavior under a Dynamic Regulatory Adjustment Process

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  • David Sappington

Abstract

The regulatory mechanism proposed by Vogelsang and Finsinger (V-F) will induce the regulated firm to adopt behavior other than myopic profit maximization. Pure waste, inefficient factor utilization, excessive research and development, and overinvestment in demand-increasing expenditures may be employed by the firm to increase long-run profits. The particular type of strategic behavior adopted, and the extent to which it is pursued, will depend upon the firm's allowed rate of return on capital, its discount rate, and the information it receives regarding the regulatory regime. Under reasonable conditions, the strategic behavior induced by V-F regulation will cause a significant reduction in consumers' surplus plus producer's profit below the level achieved in the absence of any regulation.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 11 (1980)
Issue (Month): 1 (Spring)
Pages: 360-372

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Handle: RePEc:rje:bellje:v:11:y:1980:i:spring:p:360-372

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Cited by:
  1. repec:reg:wpaper:255 is not listed on IDEAS
  2. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2004. "Strategic behaviour under regulatory benchmarking," Energy Economics, Elsevier, vol. 26(5), pages 825-843, September.
  3. Joskow, P.L., 2006. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," Cambridge Working Papers in Economics 0607, Faculty of Economics, University of Cambridge.
  4. Noel Uri, 2001. "Telecommunications in the United States and Changing Productive Efficiency," Journal of Industry, Competition and Trade, Springer, vol. 1(3), pages 321-335, September.
  5. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
  6. William P. Rogerson, 1993. "Inter-temporal Cost Allocation and Managerial Investment Incentives," Discussion Papers 1060, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Uri, Noel D., 2003. "The adoption of incentive regulation and its effect on technical efficiency in telecommunications in the United States," International Journal of Production Economics, Elsevier, vol. 86(1), pages 21-34, October.
  8. Seeto, Dewey Q. & Woo, C. K. & Horowitz, Ira, 2001. "Finessing the unintended outcomes of price-cap adjustments: an electric utility multi-product perspective," Energy Policy, Elsevier, vol. 29(13), pages 1111-1118, November.
  9. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
  10. Covaleski, Mark A. & Dirsmith, Mark W., 1995. "The preservation and use of public resources: Transforming the immoral into the merely factual," Accounting, Organizations and Society, Elsevier, vol. 20(2-3), pages 147-173.
  11. Covaleski, Mark A. & Dirsmith, Mark W. & Samuel, Sajay, 2003. "Changes in the institutional environment and the institutions of governance: extending the contributions of transaction cost economics within the management control literature," Accounting, Organizations and Society, Elsevier, vol. 28(5), pages 417-441, July.
  12. Willems, Bert & De Corte, Emmanuel, 2008. "Market power mitigation by regulating contract portfolio risk," Energy Policy, Elsevier, vol. 36(10), pages 3787-3796, October.
  13. Uri, Noel D., 2001. "The effect of incentive regulation on productive efficiency in telecommunications," Journal of Policy Modeling, Elsevier, vol. 23(8), pages 825-846, November.
  14. Uri, Noel D., 2001. "Regulation and Measurement of the Productivity Offset," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 31(2), pages 187-203, September.
  15. Kim, Jae-Cheol & Lee, Sang-Ho, 1995. "An optimal regulation in an intertemporal oligopoly market: The Generalized Incremental Surplus Subsidy (GISS) scheme," Information Economics and Policy, Elsevier, vol. 7(3), pages 225-249, September.
  16. Benford, Frank A., 1998. "On the Dynamics of the Regulation of Pollution: Incentive Compatible Regulation of a Persistent Pollutant," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 1-25, July.
  17. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, vol. 24(3), pages 231-248, May.
  18. Alessandro Marra, 2006. "Mixed Public-Private Enterprises in Europe: Economic Theory and an Empirical Analysis of Italian Water Utilities," Bruges European Economic Research Papers 4, European Economic Studies Department, College of Europe.

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