A Model of Regulation under Uncertainty and a Test of Regulatory Bias

David P. Baron and Robert A. Taggart

Bell Journal of Economics, 1977, vol. 8, issue 1, 151-167

Abstract: This model of an electric utility views the regulator as setting price with the firm choosing ex ante capital and labor inputs and responding to ex post demand with its fuel input and the services of the ex ante inputs. If the firm anticipates that its choice of capital stock will influence the price set by the regulator, inefficient production many result. An empirical study of 48 electric utilities in 1970 suggests that undercapitalization may be present and that regulators set price below that which unregulated firms would set given their chosen capital stock.

Date: 1977
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