ABSTRACT
Building upon the model articulated by Averch and Johnson (1962), this chapter considers the case of a firm with market power that produces a single product, using three input factors, capital and labor as in Averch-Johnson, and a third factor, research and development. Following the presentation of the three-input model, a more specific augmentation of the Averch-Johnson model is discussed in which technology is allowed to augment labor and capital separately, and an additional parameter catches the rate of research spillovers. Most importantly, in the augmented Averch-Johnson case, the unregulated firm tends to use its capital, labor, and R and D inputs efficiently, while the regulated firm tends to overuse capital relative to labor and R and D. In this model research and development is treated as simply a third factor input, indistinguishable in the production function from capital or labor. In the class of endogenous growth production functions, there are several distinct specifications.
