Managerial Discretion and Public Utility Regulation

Abstract

The major developments in the theory of the firm concerning ownership and control and managerialism have been almost entirely ignored in the economics of public utility regulation, where effort has been mainly confined to a more-refined examination of the Averch--Johnson Effect. This paper develops an elementary theory of managerial discretion in the regulated firm to remedy this. The nature of the managerial discretion phenomenon and some reasons why it might be worthy of consideration in the context of public utility regulation are examined, and a model of the regulated firm with managerial discretion is formulated. To illustrate the model, an example is used which provides a number of additional insights. The authors conclude that social welfare may increase with advertising by a regulated utility and that anti-advertising policies may be unjustified. They discuss some implications of their analysis for future research. 19 references.