Investment Behavior in U.S. Regulated Industries
Volume: Volume 2, No. 1
Issue: Spring 1971
Pages: pp. 213-263
Authors: Dale W. Jorgenson and Sidney S. Handel
Title: Investment Behavior in U.S. Regulated Industries
Abstract:
This paper develops an econometric model of investment behavior for the
regulated industries in the United States. In these industries the firm faces
a regulatory constraint; regulatory agencies fix the price of output on the
principle of a given rate of return applied to the value of assets as
determined for regulatory purposes. Companies are required to provide service
for all consumers meeting specified conditions. Regulation is effective if it
produces the same price and output that would result from a competitive market
structure. The regulatory constraint enters into the determination of demand
for capital, but replacement investment and the time structure of the
investment process are the same for regulated industries as for unregulated
industries.
The econometric model of investment behavior is applied to quarterly data for
total regulated industries and four subindustries of the regulated sector -
railroads, other transportation, public utilities, and communications.
Investment functions for three regulated industries - railroads, public
utilities, and communications - are generally satisfactory in goodness of fit
and absence of autocorrelation of errors. For nonrail transportation the
results are less satisfactory. Estimaters of the average lag between changes
in the determinants of investment and the resulting expenditures are somewhat
longer than those for manufacturing. The shape of the lag distribution
suggests a brief and sharp increase in the level of gross investment following
an initial stimulus. The period of positive stimulation from changed demand is
very limited; after the initial boom in investment expenditures, the response
to change in desired capital has a negative influence on the level of total
expenditure.
The econometric model of investment behavior is extended to encompass
intermediate stages of the investment process. Two-quarter anticipated
investment expenditures are identified with the first stage of the investment
process, and one-quarter anticipated investment expenditures with the second
stage. Actual expenditures constitute the final stage of the process. The
results for intermediate stages are generally comparable to those for actual
expenditures. The time structure of the investment process is analyzed by
estimated lags for the process as a whole by combining results from
intermediate stages. The lag structure for the intermediate stages is
consistent with the lag structure for the process as a whole.