Investment Behavior in the U.S. Electric Utility Industry, 1949-1968

Abstract

Jorgenson and Handel (J-H) applied their recently developed econometric model of investment behavior in U.S. regulated industries to four subindustries of the regulated sector. In their derivation of the demand for capital, they assumed constant returns to scale and unitary elasticity of substitution between capital and labor. For application to the U.S. electric utility industry the author finds it desirable to relax these two assumptions. Econometric studies on production and cost functions pertaining to this industry show that economies of scale are quite important and that the scope for substitution between capital and labor is limited. Using a CES production function, the author derives a more general expression for desired capital stock. This expression is incorporated in a logarithmic version of a rational distributed lag function in a manner suggested by Eisner and Nadiri. As in the J-H model, it is assumed that replacement investment is proportional to net capital stock.