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Depreciation in a Simple Regulatory Model

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  • Bruce L. Jaffee

Abstract

This study introduces depreciation as an explicit variable in a regulatory model. The goal of the firm is assumed to be maximization of discounted cash flow. For simplicity it is assumed that the firm is required to use the same type of depreciation for book and tax purposes. It is shown that under the assumptions of the model, rate-base regulation strongly affects the type of depreciation which the firm would consider optimal. More specifically, the solution of the model indicates that in order to maximize the discounted cash flow while satisfying the regulatory control, the firm should allocate depreciation in each period so that it will be an increasing function of time. As a result, undiscounted cash flow will increase through the time horizon.

Suggested Citation

  • Bruce L. Jaffee, 1973. "Depreciation in a Simple Regulatory Model," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 338-342, Spring.
  • Handle: RePEc:rje:bellje:v:4:y:1973:i:spring:p:338-342
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    Cited by:

    1. Julián David Parada, 2008. "Tasa de depreciación endógena y crecimiento económico," DOCUMENTOS DE TRABAJO 004594, UNIVERSIDAD DEL ROSARIO.

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