Regulation and the Rate and Direction of Induced Technical Change

This article examines the effect of three forms of regulation (rate of return, ceiling-price, and markup) upon the rate and direction of technical advance selected by a myopic profit maximizing firms. With a homothetic production function ceiling-price regulation induces a faster rate of technical progress than would result without regulation, and faster than that which would result with markup regulation. In addition, our results lend no support for Smith's conjecture that technical advance causes an increase in the discrepancy between the resource allocations selected by a rate of return regulated firm and those chosen by an unregulated firm.