The effects of rate-of-return regulation on the intensity of use and durability of capital

It has been suggested that rate-of-return regulation reduces the incentives for technically efficient management, because regulation eliminates much of the gain firms might normally expect to realize from such efficiency. Rather than relying upon notions of managerial slack or X- inefficiency, this paper demonstrates that under-utilization of existing capital and a sub-optimal choice of the capital stock's durability can be explained as rational profit-maximizing responses to the regulatory incentives.