Optimal regulatory policy is derived in a setting where the firm has better knowledge of demand than the regulator. When marginal production costs increase with output, the regulator can induce the firm to use its private information entirely in the social interest. When marginal costs decline with output, however, the regulator is unable to derive any benefit from the firm's superior knowledge, and a single price is established that is invariant to demand

This paper investigates the role of bank capital regulation in risk control. It is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance. Bank capital regulation is a way to redress this bias toward risk. Utilizing the mean‐variance model, the following results are shown: (a) the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks; (b) as a solution to problems of the capital ratio regulation, the “theoretically correct” risk weights under the risk‐based capital plan are explicitly derived; and (c) the “theoretically correct” risk weights are restrictions on asset composition, which alters the optimal portfolio choice of banking firms

This paper introduces a decision framework for regulating environmental health risks which incorporates the characteristic uncertainty about the dissemination and toxicological impacts of environmental contaminants and the behavioral restrictions commonly encountered. Analysis indicates that increases in uncontrollable uncertainty will increase emphasis on average performance, that more potent or less controllable risks will be regulated more stringently and that increasing aversion to uncertainty may result in poorer average performance. The paper also develops an alternative measure for valuing risk of loss of life taking into account uncertainty about health risk generation processes

Positive public-utility models should capture incentives of regulators. Regulatory objectives are specified by appeal to standard human concerns and politics and processes peculiar to public-utility regulation. Constraints that serve the regulator are thereby derived, and connections between regulatory objectives and rules illuminated. Theoretical rationales emerge for "rate-of-return" regulation under certainty, and a largely neglected type of rate-of-return regulation under uncertainty. Motives of human regulators may explain other regulatory forms as well

Reviews the book "Legal Regulation of British Company Accounts: 1836-1900," edited by J. R. Edwards

This study examines the joint effect of perquisite disclosure regulations and enforcement policies on changes in cash salary and bonus compensation paid to chief executive officers. It is hypothesized that the combined effect of an SEC perquisite disclosure requirement and the IRS policy of taxing perquisites as income causes a shift from perquisites to monetary compensation. A regression model is used to assess the changes in real compensation. The findings support the hypothesis that a change in the chief executive officers' compensation occurred as a result of the disclosure requirement and tax policies

[The paper develops a model that shows the effects of rational expectations, and of efficient markets, on public utility regulation. It is shown that the feedback from investor expectations to regulatory behavior, together with investor expectations that take account of this feedback, basically alters the consequences of regulatory decisions. The analysis examines the effects of a deviation between the allowed rate of return and the cost of capital, with both perfect and imperfect investor foresight. It also assesses the consequences of differing expected growth rates. Conclusions are drawn for the effects of regulatory decisions on resource misallocation and of regulatory lag on incentives

The paper develops a model that shows the effects of rational expectations, and of efficient markets, on public utility regulation. It is shown that the feedback from investor expectations to regulatory behavior, together with investor expectations that take account of this feedback, basically alters the consequences of regulatory decisions. The analysis examines the effects of a deviation between the allowed rate of return and the cost of capital, with both perfect and imperfect investor foresight. It also assesses the consequences of differing expected growth rates. Conclusions are drawn for the effects of regulatory decisions on resource misallocation and of regulatory lag on incentives

Incentive problems arise in the electric utilities industry as a consequence of the institutional and legal arrangements of the cost-plus pricing regime under which natural and statutory monopolies operate. In the United States, such monopolies operate under a cost recovery system that gives the firm a mechanism by which it can shift all or part of the cost of moral hazard risk to consumers, who then become the residual claimants (Sherman [1980]). In this setting, expense accruals have a more direct link to the firm's cash flows than is the case in unregulated industries. In particular, pricing a monopolist's output at cost-plus means that accruing expenses generates sales revenues for utilities. Consequently, agency cost can be included in the allowable cost passed on to consumers. The result is that the residual loss is shared between the consumers and shareholders with two competing consequences: (1) it would be in the best interest of shareholders to provide managers with incentives to shift all costs to the consumer; and, by the same token, (2) it would be in the consumers' interest to persuade regulators to challenge the cost assumptions underlying the firms' requests for revenue requirements

The economic theory of regulation suggests that occupational licensing laws are enacted and administered to advance the interests of licensed practitioners. For example, grading standards on licensing examinations could be altered to protect incumbent practitioners from new competitors. This possibility is investigated with time series data of Uniform CPA Examination results for California and Illinois. The results indicate that when the exam was graded by the individual states, exam failure rates increased with downturns in economic activity (as measured by unemployment rates). However, the evidence shows no statistical relation between failure rates and economic activity in the years after each of the states adopted the AICPA's Advisory Grading Service