Doctoral Dissertations
Date of Award
3-1987
Degree Type
Dissertation
Degree Name
Doctor of Philosophy
Major
Economics
Major Professor
David L. Kaserman
Committee Members
John W. Mayo, Hui S. Chang, Don P. Clark, David M. Welborn
Abstract
Most of the Averch-Johnson type literature on the behavior of the regulated firm assumes that the allowed rate of return is exogenously given to the regulated firm. This assumption, however, ignores the real possibility that the regulated firm may influence the decision making process of the regulator and thereby change regulatory outcomes. In fact, a considerable body of literature, beginning with the seminal work of Stigler (1971), indicates that the regulated firm has some control over the regulator. Given this control, regulation becomes endogenous to the firm's decision making process.
This dissertation, both theoretically and empirically, explores the endogeneity of regulation and its implications. In particular, the various state regulatory commissions' determination of the allowed rate of return permits us to examine the possibility of the endogeneity of the allowed rate of return. A simple theoretical model shows that the regulated firm is able to increase its allowed rate of return by influencing the regulator.
A three-equation recursive system of state regulatory commissions' determination processes of the allowed rate of return is developed so that we can identify determinants of the allowed rate of return and also explore whether or not the regulatory outcome is changed by the firm's influence. The variable representing the degree of the firm's influence used in this study is regulatory expenses -- the expenditure that the firm incurs in its attempt to influence regulatory outcomes. Subsequently, the thesis develops a simple model to derive the firm's optimal level of regulatory expenses and constructs hypotheses concerning the determinants of these optimal expenses. The data employed in these tests pertain to 122 electric utility rate cases decided between 1980 and 198A.
The empirical results indicate that the allowed rate of return is subject to the influence that the firm wields in the regulatory hearing process. This provides support for the hypothesis that the rate-of-return constraint is endogenous to the regulated firms. Moreover, the empirical results also indicate that the firm's investment in influencing regulatory outcomes is responsive to factors suggested by the theory of optimal regulatory expenditure that is derived. At a more general level, the results support the approach embodied in the economic theory of regulation.
Recommended Citation
Im, Bae-Geun, "The Endogeneity of the allowed rate of return and the economic theory of regulation. " PhD diss., University of Tennessee, 1987.
https://trace.tennessee.edu/utk_graddiss/12078