Scale Economies and Over-Capitalization in Japanese Electric Utilities

Abstract

This paper presents empirical evidence on scale economies and overcapitalization in Japanese electric utilities. We employ the short-run equilibrium model in which the variable cost function treats capital stock as a quasi-fixed factor. We specify the variable cost function as a translog form and estimate it using panel data of nine Japanese electric utility firms during the period 1981 to 1985. Our results show that eight of the nine firms experience scale economies in the short run but diseconomies in the long run, and that seven firms significantly over-capitalize as expected by the Averch-Johnson effect.