A Frontier Approach to Testing the Averch-Johnson Hypothesis

Donald F. Vitaliano and Gregory Stella
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Gregory Stella: New York State Public Service Commission

Rensselaer Working Papers in Economics from Rensselaer Polytechnic Institute, Department of Economics

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.

JEL-codes: L94 C61 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff
Date: Written 2006-06
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