| This study develops an empirical model based on the utility maximizing theory of the firm, which is put into a formal analysis by Williamson (1964). Its purpose is to test the hypothesis that the manager in a privately owned utility firm has an objective to maximize his own utility function instead of the profit of the firm. This utility function is assumed to depend on the profit, administrative expense, and labor and staff of the firm. Results of the test indicate that the manager maximizes his utility function in operating a public utility firm. This utility function is nonhomothetic. It is also found that the marginal utility of profit is much higher than that of administrative expense whereas the marginal utility of labor is zero and, in many cases, is negative. Since the manager is in the range of diminishing marginal utility, this result is consistent with a strict control on public utility profits by the regulatory commission. It implies that a utility firm does not expand its rate base to the full extent in order to earn all of the excess profit. Instead, some operating expenses are also increased to absorb part of it. This study also shows that organizational slack exists in public utilities, which is a necessary condition for such a managerial discretion. |
