| Summary: | It is with this corollary hypothesis that this paper will be primarily concerned. The analysis will attempt to provide an overview of the preceding research and to systematically develop an econometric model which will then be used to examine this proposition using data drawn from privately-owned steam-electric utility firms in the United States. While the general approach and the data source of this paper are similar to those employed by Petersen and Hayashi and Trapani, the principle difference results from the empirical specification of the rate-of-return to capital allowed by the regulatory authority. As will be shown, if the firm's adjustment to equilibrium is incomplete in the sense that the firm is out of equilibrium at the point of observation, the preceding researchers' use of the actual rate-of-return earned by the firm as a proxy for the allowed rate could result in a bias toward confirming the hypothesis that tightening the degree of regulation would induce the firm to employ relatively more capital. Hence, the specification employed in this paper will allow explicitly for the possibility that the firm is not at equilibrium. Using such a specification, the input demand functions for the firm form a simultaneous system of equations which will be estimated using a full-information estimation procedure.
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