Regulation effects on resource allocation of a utility-maximizing firm |
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Authors: | Michael Landsberger Abraham Subotnik |
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Institution: | Technion, Israel Institute of Technology, Haifa, Israel |
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Abstract: | The literature on the effects of rate of return regulation on the allocation of resources was mostly devoted to the classical case of a profit-maximizing monopolist. An attempt is made in this paper to extend the analysis to a firm who maximizes a utility function with profits and revenue as arguments. We prove that a meaningful presentation of the regulation effects implies the formulation of two constraints. Whether the firm over-or undercapitalizes depends on whether the constraint is imposed as an upper or a lower limit. The higher the profit motive the higher the capital-labor ratio and the marginal rate of substitution between labor and capital. |
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