The Effects of Regulation on Research and Development: Theory and Evidence

While other aspects of the effects of regulation on resource allocation have received considerable attention, the impact of regulation on the innovative p ropensities of regulated firms has generated only limited and somewha t tenuous evidence. Accordingly, this article investigates the effect s of regulation and firm structure on research and development (R&D) expenditures. A simple model of the behavior of a firm under a rate-o f-return regulation suggests that both the stringency of the allowed rate-of-return constraint and the inclusion or exclusion of R&D in a firm's rate base will be key determinants of firm level R&D expenditu res. The empirical results strongly support the theoretical model. Copyright 1988 by the University of Chicago.

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