BPEA | 1992: Microeconomics

Governance Structure, Managerial Characteristics, and Firm Performance in the Deregulated Rail Industry

Ann F. Friedlaender,
Ann F. Friedlaender Massachusetts Institute of Technology
Ernst R. Berndt, and
Ernst Berndt
Ernst R. Berndt Professor in Applied Economics Emeritus - MIT Sloan School of Management
Gerard McCullough
Gerard McCullough Massachusetts Institute of Technology

Microeconomics 1992

THE PASSAGE OF the Staggers Act in 1980, which removed most federal economic regulations from the rail industry, provided the managers of U.S. railroads with a clear legislative sanction to earn a fair return on capital. To this end, they undertook a number of initiatives to rationalize their rate structure, input utilization, and scale of operations to increase returns to competitive levels. The number of Class I railroads has been reduced from 37 to 14; railroad labor has been trimmed 52 percent, and route mileage 29 percent. Rates of return have risen substantially, although by 1990 no railroad had consistently earned its cost of capital. Railroad companies have shared the benefits of deregulation with shippers, in the form of improved service and moderate real rates, and with shareholders, in the form of higher returns. Thus, managers have not only responded to the opportunities provided by the competitive market, but have also been increasingly subject to its discipline.