Averch-Johnson effect

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The Averch-Johnson effect is the tendency of companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies profits to capital ratio is regulated at a certain percentage then there is a strong incentive for companies to over-invest in order to increase profits overall. This goes against any optimal efficiency point for capital that the company may have calculated as higher profit is almost always desired over and above efficiency.[1]

[edit] References

  1. ^ BEHAVIOR OF THE FIRM UNDER REGULATORY CONSTRAINT. By: Averch, Harvey; Johnson, Leland L.. American Economic Review, Dec62, Vol. 52 Issue 5, p1052, 18p;