Averch–Johnson effect

The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage then there is a strong incentive for companies to over-invest in order to increase profits overall. This investment goes beyond any optimal efficiency point for capital that the company may have calculated as higher profit is almost always desired over and above efficiency.[1]

Excessive capital accumulation under rate of return regulation is informally known as 'gold plating'.[2]

See also

References

  1. ↑ Averch, Harvey; Johnson, Leland L. (1962). "Behavior of the Firm Under Regulatory Constraint". American Economic Review 52 (5): 1052–1069. JSTOR 1812181.
  2. ↑ West, Michael (31 January 2013). "'Gold plating' rife, assets in for a hiding". The Age. Retrieved 6 January 2015.

External links

Body of Knowledge on Infrastructure Regulation: Incentive Features and Other Properties


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