Depreciation policies in regulated companies: Which policies are the most efficient?

Depreciation policies in regulated companies: Which policies are the most efficient?

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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: ,
Keywords: equipment, investment
Abstract:

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.

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