Bureaucracy, economic regulation, and the incentive limits of the firm

Abstract

This paper uses a transactions cost perspective to examine the development of organizational tendencies that plague the governance of unregulated subsidiaries by regulated parent companies. By focussing on what Williamson (1985) calls the ‘incentive limits’ of firms, conditions that should exacerbate the problems facing these firms as they diversify are identified. Empirical testing of hypotheses drawn from this discussion is conducted using a sample of nonutility, nonregulated subsidiaries of 54 electric utilities. The analysis, using both linear regression and event history methods, confirms the connection between the characteristics of the regulated parent company and subsidiary performance. The paper concludes with a discussion of how further research might extend the state of knowledge on the topic of the economic losses of bureaucracy.