Abstract
The main purpose of this paper is to investigate the optimal investment behaviour of a regulated firm and to show that the Averch-Johnson effect of overcapitalization does not necessarily occur in a dynamic model under the assumption of concave revenue function. There may be three cases of undercapitalization, overcapitalization, and neutralization. As the result, whether the Averch-Johnson effect appears or not is crucially dependent on the regulated rate of return and the firm's planning horizon.
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