Profit Regulation of Defense and Prizes for Innovation
Abstract
The defense sector is subject to a form of cost-based economic regulation, just as public utilities are. A set of regulations that are as detailed, all-encompassing, and arcane as any that can be found in other regulated sectors determines the prices that defense contractors will receiver for their products. These regulations are often referred to as the Department of Defense (DoD) profit policy. Although economists have made great strides in analyzing the nature of the regulatory problem in several industries, little attention has been devoted to the defense sector. The goal of this report is to describe and empirically investigate an extremely simple theory that captures an important aspect of the nature of the regulatory problem in defense contracting. The theory describes a critical difference between the regulatory problems in defense and public utilities and therefore suggests why different rules and institutions might be appropriate in each case. Furthermore, it yields several implications regarding how an optimal regulatory policy should be structured and sheds light on current policy debates over DoD profit policy. A large part of the document is devoted to empirically verifying that the incentives posited by the theory exist and are large.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jan 01, 1992
- Accession Number
- ADA253965
Entities
People
- William P. Rogerson
Organizations
- RAND Corporation