Rate of Return Regulation and Efficiency in Production: An Empirical Test of the Averch-Johnson Thesis

Robert M. Spann

Bell Journal of Economics, 1974, vol. 5, issue 1, 38-52

Abstract: Eleven years ago, Harvey Averch and Leland Johnson demonstrated that firms subject to rate of return regulation have an incentive to use inputs in proportions that differ from the cost minimizing input levels. In the intervening years, numerous theoretical papers have appeared in the literature refining their original thesis but, until recently there has been little or no empirical testing of this proposition. In this paper a test of the Averch-Johnson thesis using the trans-log production function is derived. The test is applied to data from regulated electric utilities and the Averch-Johnson thesis is confirmed.

Date: 1974
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