IDEAS home Printed from https://ideas.repec.org/p/rpi/rpiwpe/0613.html
   My bibliography  Save this paper

A Frontier Approach to Testing the Averch-Johnson Hypothesis

Author

Listed:
  • Donald F. Vitaliano

    () (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA)

  • Gregory Stella

    (New York State Public Service Commission)

Abstract

The mathematical programming technique Data Envelopment Analysis is used to test the hypothesis of Averch and Johnson that utility regulation leads to overuse of capital. 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, and r is based on the Capital Asset Pricing Model. Capital is overused relative to fuel, but not labor. But regression analysis fails to find a significant relationship between the overuse of capital and the subsidy s-r.

Suggested Citation

  • 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.
  • Handle: RePEc:rpi:rpiwpe:0613
    as

    Download full text from publisher

    File URL: http://www.economics.rpi.edu/workingpapers/rpi0613.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. D. S. Prasada Rao & Bart van Ark, 2013. "Introduction," Chapters,in: World Economic Performance, chapter 1, pages 1-6 Edward Elgar Publishing.
    2. Ray,Subhash C., 2012. "Data Envelopment Analysis," Cambridge Books, Cambridge University Press, number 9781107405264, May.
    3. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    4. 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.
    5. 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.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rpi:rpiwpe:0613. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shawn Kantor). General contact details of provider: http://edirc.repec.org/data/derpius.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.