A Frontier Approach to Testing the Averch-Johnson Hypothesis
AbstractThe mathematical programming technique Data Envelopment Analysis is used to test the famous hypothesis of Averch and Johnson that utility regulation leads to overuse of capital because the regulated firm earns a return s greater than its cost of capital r, an implicit capital subsidy resulting in allocative inefficiency. Technical and allocative inefficiency are based on cost and production frontiers from 337 electric generating plants using 1970 data, and r is based on the Capital Asset Pricing Model. Significant capital overuse and general failure to minimize costs is detected, but a second-step regression analysis finds no relationship between the overuse and the s-r subsidy. A small updated data set covering the period 1980-2004 suggests that overuse of capital is no longer a problem, a result that may be owing to recente deregulation and restructuring.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.
Volume (Year): 16 (2009)
Issue (Month): 3 ()
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Other versions of this item:
- Donald F. Vitaliano & Gregory Stella, 2006. "A Frontier Approach to Testing the Averch-Johnson Hypothesis," Rensselaer Working Papers in Economics 0613, Rensselaer Polytechnic Institute, Department of Economics.
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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- R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
- Leon Courville, 1974. "Regulation and Efficiency in the Electric Utility Industry," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 53-74, Spring.
- Thomas G. Cowing & V. Kerry Smith, 1978. "The Estimation of a Production Technology: A Survey of Econometric Analyses of Steam-Electric Generation," Land Economics, University of Wisconsin Press, vol. 54(2), pages 156-186.
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