Article ID: | iaor1989206 |
Country: | United States |
Volume: | 35 |
Issue: | 5 |
Start Page Number: | 515 |
End Page Number: | 526 |
Publication Date: | May 1989 |
Journal: | Management Science |
Authors: | Ronen Joshua, Srinidhi Bin |
Keywords: | equipment, investment |
Decisions of firms such as whether to purchase new equipment frequently rather than better maintain and purchase less frequently are influenced by the (accounting) depreciation policies they use if they are rate-regulated. It is shown that basing decisions on depreciation policies, while uneconomic without regulation, might become rational under regulation. Regulators can mandate depreciation policies for these firms. This paper identifies a class of depreciation rules which will eliminate management incentives to make uneconomic capital replacement and maintenance decisions under regulation.