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A Model of Regulation under Uncertainty and a Test of Regulatory Bias

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  • David P. Baron
  • Robert A. Taggart Jr.

Abstract

This model of an electric utility views the regulator as setting price with the firm choosing ex ante capital and labor inputs and responding to ex post demand with its fuel input and the services of the ex ante inputs. If the firm anticipates that its choice of capital stock will influence the price set by the regulator, inefficient production many result. An empirical study of 48 electric utilities in 1970 suggests that undercapitalization may be present and that regulators set price below that which unregulated firms would set given their chosen capital stock.

Suggested Citation

  • David P. Baron & Robert A. Taggart Jr., 1977. "A Model of Regulation under Uncertainty and a Test of Regulatory Bias," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 151-167, Spring.
    • Handle: RePEc:rje:bellje:v:8:y:1977:i:spring:p:151-167
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    Cited by:

    1. David P. Baron & Robert Taggart Jr., 1978. "Regulatory Pricing Policies and Input Choices Under Uncertainty," Discussion Papers 315, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. David P. Baron, 1977. "On the Relationship Between Complete and Incomplete Financial Markets Models," Discussion Papers 241, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Maria Brouwer, 2001. "Deregulation of Network Industries – Theory and Dutch Experience," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 3-27.
    4. David P. Baron & Raymond R. De Bondt, 1980. "Factor Price Changes," Discussion Papers 417, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Francis J. CRONIN & Stephen A. MOTLUK, 2007. "Agency Costs Of Third‐Party Financing And The Effects Of Regulatory Change On Utility Costs And Factor Choices," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 78(4), pages 537-565, December.
    6. 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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