Regulatory lag and deregulation with imperfectly adjustable capital

Daniel F. Spulber; Robert A. Becker

doi:10.1016/0165-1889(83)90046-5

Regulatory lag and deregulation with imperfectly adjustable capital

Daniel F. Spulber^*, Robert A. Becker

^*Corresponding author for this work

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Research output: Contribution to journal › Article › peer-review

2 Scopus citations

Abstract

The dynamic effects of regularity lag and deregulation on the behavior of a firm with imperfectly adjustable capital are examined. Given adjustment costs and irreversible investment, the firm reacts in advance to anticipated changes in regulation. In the regulatory lag case, capital increases after regulation is imposed. The Averch-Johnson effect is observed before regulation, but not necessarily afterwards. Sufficient conditions are given for the capital bias to increase. The regulated firm may choose inputs reflecting either a labor or capital bias in anticipation of deregulation. Sufficient conditions are given for the capital bias to be lessened by deregulation.

Original language	English (US)
Pages (from-to)	137-151
Number of pages	15
Journal	Journal of Economic Dynamics and Control
Volume	6
Issue number	C
DOIs	https://doi.org/10.1016/0165-1889(83)90046-5
State	Published - Sep 1983

Funding

*Spulber’s’research is supported by the National Science Foundation under Grant Nos. SOC 79-07201 and SES 81-05852. We thank Robert Schmitx for useful conversations and the referees for their helpful suggestions for revision of the paper. ‘See, for example, Averch and Johnson (1962), Takayama (1969), and Baumol and KIevorick (1970). An exception is El-Hodiri and Takayama (1981) who assume adjustment costs and irreversibilities. This is discussed further below. A number of papers consider the effects of regulatory lag when the output price is imperfectly adjusted by the regulators; see Bailey and Coleman (1971), Baumol and Klevorick (1970) and Davis (1973). These papers assume that the firm’s inputs are perfectly flexible. An interesting problem for future research would be to combine imperfect adjustment of rates with inflexible inputs but that is beyond the scope of the present paper. See also the extensive dynamic analysis of Klevorick (1973) concerning operation and research activities of a firm subject to stochastic regulatory reviews.

ASJC Scopus subject areas

Economics and Econometrics
Control and Optimization
Applied Mathematics

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title = "Regulatory lag and deregulation with imperfectly adjustable capital",

abstract = "The dynamic effects of regularity lag and deregulation on the behavior of a firm with imperfectly adjustable capital are examined. Given adjustment costs and irreversible investment, the firm reacts in advance to anticipated changes in regulation. In the regulatory lag case, capital increases after regulation is imposed. The Averch-Johnson effect is observed before regulation, but not necessarily afterwards. Sufficient conditions are given for the capital bias to increase. The regulated firm may choose inputs reflecting either a labor or capital bias in anticipation of deregulation. Sufficient conditions are given for the capital bias to be lessened by deregulation.",

author = "Spulber, {Daniel F.} and Becker, {Robert A.}",

note = "Funding Information: *Spulber{\textquoteright}s{\textquoteright}research is supported by the National Science Foundation under Grant Nos. SOC 79-07201 and SES 81-05852. We thank Robert Schmitx for useful conversations and the referees for their helpful suggestions for revision of the paper. {\textquoteleft}See, for example, Averch and Johnson (1962), Takayama (1969), and Baumol and KIevorick (1970). An exception is El-Hodiri and Takayama (1981) who assume adjustment costs and irreversibilities. This is discussed further below. A number of papers consider the effects of regulatory lag when the output price is imperfectly adjusted by the regulators; see Bailey and Coleman (1971), Baumol and Klevorick (1970) and Davis (1973). These papers assume that the firm{\textquoteright}s inputs are perfectly flexible. An interesting problem for future research would be to combine imperfect adjustment of rates with inflexible inputs but that is beyond the scope of the present paper. See also the extensive dynamic analysis of Klevorick (1973) concerning operation and research activities of a firm subject to stochastic regulatory reviews.",

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Regulatory lag and deregulation with imperfectly adjustable capital

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