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Resource Allocation and the Regulated Firm

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  • Elizabeth E. Bailey
  • John C. Malone

Abstract

This paper extends a simple economic model of the regulated firm to include a wider range of both management objectives and of regulatory constraint. The authors find that these generalizations in the assumptions are able to effect profound alterations in the conclusions. For example, if a firm is constrained to a fair return on invested capital, we find that the profit-maximizing firm would have an incentive to overcapitalize (the Averch-Johnson result), while the sales or output maximizing firm would have an incentive to undercapitalize. If any of several other methods of constraint are used, the authors find that there is no incentive to alter the relative amounts of labor and capital employed in the production process.

Suggested Citation

  • Elizabeth E. Bailey & John C. Malone, 1970. "Resource Allocation and the Regulated Firm," Bell Journal of Economics, The RAND Corporation, vol. 1(1), pages 129-142, Spring.
    • Handle: RePEc:rje:bellje:v:1:y:1970:i:spring:p:129-142
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    Cited by:

    1. Meredith Fowlie, 2010. "Emissions Trading, Electricity Restructuring, and Investment in Pollution Abatement," American Economic Review, American Economic Association, vol. 100(3), pages 837-869, June.
    2. Kalu, Timothy Ch. U., 1995. "A uniform profit margin policy and its effects on mineral producing firms The case of the oil industry," Resources Policy, Elsevier, vol. 21(1), pages 61-72, March.
    3. C. A. Knox Lovell, 1976. "Output of the Constrained Revenue Maximizing Firm," Eastern Economic Journal, Eastern Economic Association, vol. 3(1), pages 52-58, January.
    4. Milton Russell & Robert Shelton, 1974. "A model of regulatory agency behavior," Public Choice, Springer, vol. 20(1), pages 47-62, December.
    5. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters, in: Studies in Public Regulation, pages 1-78, National Bureau of Economic Research, Inc.
    6. Philip Fanara Jr. & David M. Sweet, 1984. "What Do Regulated Firms Maximize?," The American Economist, Sage Publications, vol. 28(1), pages 44-48, March.
    7. Nongluk Buranabunyut & James Peoples, 2012. "An empirical analysis of incentive regulation and the allocation of inputs in the US telecommunications industry," Journal of Regulatory Economics, Springer, vol. 41(2), pages 181-200, April.

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