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.

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