Introduction, 624. — Economic disturbances and valuation discrepancies, 626. — Pursuit of monopoly and economies of scale as determinants of merger, 629. — Statistical tests, 631. — Security prices and valuation discrepancies, 637.

IN recent years, surveys of capital expenditure plans have occupied a prominent place in forecasting economic activity, and considerable effort has been devoted to establishing the sources of discrepancies between plans and realized expenditures. This paper deals with systematic errors that arise from the planning process itself. Such errors may be distinguished from discrepancies between plans and realizations that result from changes in the economic environment or from shifts in business expectations about earnings, sales, or other economic variables. More specifically, the discussion focuses on the reasons for consistent tendencies to underor over-estimate plant and equipment outlays and, in particular, on the alleged relation between size of firm and such tendencies. suggested hypotheses are tested against data for the electric utility industry. While discussion of consistent biases in investment forecasts is scattered through a large number of sources, the most detailed studies of the problem were carried out by Friend and Bronfenbrenner I and by Foss and Natrella.2 In both, data from S.E.C. -Department of Commerce surveys of capital expenditure plans were used. Both pairs of authors found the accuracy of forecasts to be positively correlated with the asset size of firms and with the scale of investment programs.3 (Scale was measured by the volume of planned investment relative to fixed assets.) Except for firms in the top size class (those with total assets of more than $50 million), Friend and Bronfenbrenner found a tendency to understate planned relative to realized investment. Foss and Natrella found that large firms overestimated their future investment expenditures, though large firms with plans for only small outlays generally underestimated their outlays. Small and mediumsized firms underestimated their future expenditures when their prospective investment programs were small or moderate-sized but showed no consistent tendency to underor overestimate when these programs were large. Friend and Bronfenbrenner regard the tendency to underestimate expenditures as a consequence of omissions from capital budgets of small or contingent items.4 They explain the more accurate predictions of large firms in terms of three factors. First, large firms have many projects with the result that positive errors for some projects cancel out the negative errors on others. Second, large firms are able to allow in their budgets, on the basis of average experience, for such contingent expenditures as those occasioned by breakage. Third, capital budgeting procedures of small and large firms differ: the latter plan further in advance and their budgeting procedures are more formalized and less flexible hence, deviations from plans are less likely. Foss and Natrella agree that variations in capital budgeting procedures have probably contributed to differences in the forecasting performance of large and small firms. However, they conclude that a positive association (present in the period covered by their study) between firm size and size of investment program was a strategic factor in producing these differences. They also suggest that supply shortages which characterized the post-war economy may have been a central factor in explaining ' Irwin Friend and Jean Bronfenbrenner, Plant and Equipment Programs and their Realization, Conference on Research in Income and Wealth, Studies in Income and Wealth, XVII (Princeton University Press, I955). Also, Investment Programs and their Realization, Survey of Current Business, XXX (December I950). 2Murray F. Foss and Vito Natrella, The Structure and Realization of Business Investment Anticipations, Conference of the Universities National Bureau Committee on Economic Research, Quality and Economic Significance of Anticipations Data (Princeton University Press, I960). 'On the other hand, Eisner working with data from the McGraw-Hill surveys, found no clear relation between scale of investment plans and accuracy of forecasts. However, he did find a distinct relation between accuracy of forecasts and size of firm. Robert Eisner, Plans, and Capital Expenditures: A Synthesis of Ex Post and Ex Ante Data, in Mary Jean Bowman, Expectations, Uncertainty, and Business Behavior (Social Science Research Council,

A LTHOUGH homogeneous capital stocks remain a frequent construct in growth theory and the literature on production relations, economists have not missed the fact that trucks are not lathes. Thus considerable effort has gone into specifying the conditions under which aggregation is conceptually permissible.1 Recently, the aggregation of capital services from diverse capital stocks has become an important consideration in the explanation of productivity change for the American economy. Jorgenson and Griliches 2 note the rise in the ratio of equipment stocks to structures stocks over the period 1945-1965. They employ the presumed increase in aggregate capital services from the use of relatively shorter lived assets to explain about 25 per cent of the residual change in the measure of total factor productivity. But very little has been done thus far to identify those variables that exert major influences on changes in the composition of capital goods.3 This paper is directed toward a remedy for this deficiency. In assessing shifts in composition, we have two principal objectives. First, to determine (through the use of an investment matrix) the extent to which changes in the composition of aggregate investment arise from differential industry investment rates as distinct from changes in the coefficients of the matrix itself. Second, to ascertain the determinants of the shifts in aggregate investment, particularly the ratio of equipment to structures. We shall show that the relative prices of capital goods have not been among the principal determinants of such substitution. The theory and estimates of this paper ascribe the changes in composition to variations in the relative costs of capital and labor and to the shift of investment in times of capacity expansion toward new plants with higher ratios of structures to equipment outlays than those for existing plants.

The paper examines learning by doing in the context of a production function in which the other arguments are labor, human capital, physical capital, and vintage as a proxy for embodied technical change in physical capital. Learning is further decomposed into organization learning, capital learning, and manual task learning. The model is tested with time-series and cross-section data for various samples of up to 2,150 plants over a 14-year period.

This paper examines learning by doing in the context of a production function in which the other arguments are labor, human capital, physical capital, and vintage as a proxy for embodied technical change in physical capital. Learning is further decomposed into organization learning, capital learning, and manual task learning. The model is tested with time-series and cross-section data for various samples of up to 2,150 plants over a fourteen-year period. Copyright 1993 by University of Chicago Press.

The paper develops a model that shows the effects of rational expectations, and of efficient markets, on public utility regulation. It is shown that the feedback from investor expectations to regulatory behavior, together with investor expectations that take account of this feedback, basically alters the consequences of regulatory decisions. The analysis examines the effects of a deviation between the allowed rate of return and the cost of capital, with both perfect and imperfect investor foresight. It also assesses the consequences of differing expected growth rates. Conclusions are drawn for the effects of regulatory decisions on resource misallocation and of regulatory lag on incentives.

[The paper develops a model that shows the effects of rational expectations, and of efficient markets, on public utility regulation. It is shown that the feedback from investor expectations to regulatory behavior, together with investor expectations that take account of this feedback, basically alters the consequences of regulatory decisions. The analysis examines the effects of a deviation between the allowed rate of return and the cost of capital, with both perfect and imperfect investor foresight. It also assesses the consequences of differing expected growth rates. Conclusions are drawn for the effects of regulatory decisions on resource misallocation and of regulatory lag on incentives.]

This paper shows that firm-specific economies of scale—or net overall economies—are correlated with subadditivity. Both economies of scale and subadditivity are a decreasing function of firm size. Most firms are observed to be in the relatively flat portion of the long-run average cost curve, with pronounced economies of scale observable only at the low end of the scale. Economies of scope, as reflected in cost complementarities, do not appear to be a source of subadditivity. The results are estimated using translog total cost functions, and the fact that these cost functions include arguments for the quality of capital and of labor represents an innovation in methodology.