Dynamics of rate-of-return regulation


Rajan, Madhav V. ; Reichelstein, Stefan ; Nezlobin, Alexander



URL: https://www.gsb.stanford.edu/faculty-research/work...
Document Type: Working paper
Year of publication: 2011
The title of a journal, publication series: Working papers
Volume: 2041
Place of publication: Stanford, CA
Publishing house: Stanford Graduate School of Business
Publication language: English
Institution: Business School > Stiftungsprofessur für ABWL (Reichelstein 2018-)
Subject: 330 Economics
Abstract: Under rate-of-return regulation, a firm's product prices are constrained by the requirement that investors not earn more than an allowable return on the firm's assets. This paper examines the dynamic properties of the rate-of-return regulation process when the regulated firm periodically undertakes new capacity investments. Our analysis identifies prices that correspond to stationary values of the regulation process. It is shown that the underlying depreciation rules for property, plant, and equipment determine whether these stationary prices will be above, equal to, or below the long-run marginal cost of providing the regulated service. We provide conditions under which the rate-of-return regulation process is dynamically stable so that prices indeed converge to their stationary values. The overall efficiency of this regulation method is shown to depend on how well the applicable depreciation schedule matches the productivity pattern of the assets in use.

Dieser Datensatz wurde nicht während einer Tätigkeit an der Universität Mannheim veröffentlicht, dies ist eine Externe Publikation.




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Rajan, Madhav V. ; Reichelstein, Stefan ; Nezlobin, Alexander (2011) Dynamics of rate-of-return regulation. Working papers Stanford, CA 2041 [Working paper]


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