Three essays on current issues of regulatory economics

The first essay deals with the optimal capital recovery policy for a rate-of-return (ROR) regulated firm faced with capital income taxation and for a price-cap (PC) regulated firm faced with technological change. Rogerson\u27s model (1992) is extended. The results show that the optimal amortization schedule is not Rogerson\u27s Real Constant (RC) amortization schedule in general. The second essay develops a model of the behavior of a regulated firm in response to regulatory standards, where violation of the standards can lead to penalties. The model considers several extensions of the Kambhu (1989) model in which violations of standards can be contested by the regulated firm, e.g., in formal or informal judicial hearings. In a deterministic model, extending that of Kambhu, the possibility of contesting violations is shown to lead to higher levels of compliance than when legal recourse is not available to the firm. A stochastic model is then developed in which uncertainty arises with respect to the efficacy of legal recourse in contesting violations and penalties arising from such violations. The results indicate, inter alia, that if the social loss from noncompliance is sufficiently large, the regulator should cite violations upon observing low performance, even though this citation may be subject to judicial error and even though the regulator may induce costly litigation through the firm\u27s response to such cited violations. The third essay continues the discussion of the second essay in the context of health and safety regulation. This essay is concerned with an employer who makes capital decisions and an employee (a safety manager ) who makes other decisions, both of which impact on the safety of operations. The issue of externality is introduced if the employee faces penalties for accidents and the employer does not. If the penalty of the safety manager for negligence is severe or the employer\u27s loss from an accident is small, the employer may not have sufficient incentive to invest in safety. Even when the private and social losses from accidents are identical, this externality persists and subsidies or other interventions may be required to remedy the problem. It is shown that in a competitive labor market where the safety manager is free to find employment elsewhere in the economy, this externality may be mitigated and might even disappear altogether. (Abstract shortened by UMI.