Averch-Johnson Effect

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The Averch-Johnson effect describes the incentive distortion in the regulated natural monopoly . A regulatory profit restriction on the capital employed ( "rate of return" regulation ) accordingly distorts the company's factor input decision. An inefficiently high amount of capital is used (overcapitalization) and the demand for labor is displaced. A market regulation can not therefore easily to the market first-best solution traced.

This effect was described by Averch and Johnson in 1962. It is one of the most influential discoveries in regulatory economics. To mitigate the effect was in 1983 by Stephen Littlechild the price-cap regulation proposed today dominates the German regulatory policy (especially in telecommunications).

literature

  • Harvey Averch, Leland L. Johnson: Behavior of the Firm Under Regulatory Constraint . In: American Economic Review , 52 (1962), No. 5, pp. 1052-1069.