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A trucker's dilemma: Managerial behavior under an operating‐ratio standard
Author(s) -
Giordano James N.
Publication year - 1989
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090100307
Subject(s) - dilemma , commission , earnings before interest and taxes , economics , equity (law) , microeconomics , deregulation , incentive , operating margin , operating model , operating expense , business , accounting , marketing , finance , macroeconomics , mathematics , return on assets , geometry , profitability index , political science , law
A model of an individually regulated trucking firm is extended to reflect collective regulation by the operating‐ratio method as conducted for many years by the ICC. The game‐theoretic extension predicts that managers will not respond to a required operating ratio, in cartel‐like manner, by increasing expenses in pursuit of higher profit. This result undermines the Commission's stated belief that an operating‐ratio standard, even when applied collectively, imparted such an incentive. An empirical test supports the conclusion that tighter regulation, measured by higher achieved operating ratios, did not invite increased employment of the variable factors. On the contrary, tighter regulation is found inversely related to the employment of all factors and, implicitly, to industry output. Deregulation of entry and rates was thus a more likely source of improved managerial efficiency than merely switching from an operating ratio to a return‐on‐equity standard, as tbe Commission did in 1978.