Regulatory Lag and Deregulation with Imperfectly Adjustable Capital

The dynamic effects of regularity lag and deregulation on the behavior of a firm with imperfectly adjustable capital are examined. Given adjustment costs and irreversible investment, the firm reacts in advance to anticipated changes in regulation. In the regulatory lag case, capital increases after regulation is imposed. The Averch-Johnson effect is observed before regulation, but not necessarily afterwards. Sufficient conditions are given for the capital bias to increase. The regulated firm may choose inputs reflecting either a labor or capital bias in anticipation of deregulation. Sufficient conditions are given for the capital bias to be lessened by deregulation.