D OUBTS have increasingly beset economists regarding the serviceability of the simplification known as economic man in explaining behavior. rise of the large corporation is unquestionably the biggest single contributor to this uneasiness. There is suspicion that a divorce of ownership and control leads to corporation growth, continuity and survival often taking precedence over pure profit maximization in the subjective preference scales or objectives of professional managements.' In essence, it is suggested that seeks a multiplicity of goals rather than only the goal of profits. Business firms with different goals may, of course, desire different relationships between recorded measures of performance. To take an extreme example, let the relationship between investment and sales be defined by one of two objectives: (1) minimizing costs by achieving optimal capacity-output relationships; and (2) obtaining as large a share of the market as possible. In both cases, a positive relationship between sales changes and investment might be expected when sales are increasing, though not necessarily of equal amounts. However, in case (1) as sales decrease, investment would also decrease, everything else equal. By contrast, in case (2) as sales decline (everything else equal, including the sales of competitors), investment could increase. Case (1), of course, is a form of the acceleration principle at the micro level while case (2) implies that the zest or need to keep pace with competitors or to maintain a market share will be registered even under adverse conditions. Other, similarly contrary examples could be cited. For example, the relationship between the age of capital stock and the rate of investment might be expected in a world of multiple motivations to be either positive or negative. As the age of the capital stock increased, the rate of investment might also be expected to increase because there would be a more urgent need for new and more efficient productive capacity. Contrarily, old equipment might be a sign of business senility or overcaution.2 Thus, firms with old equipment might * This study is one part of a series of interrelated studies of corporate and financial policies under the overall direction of Professor John Lintner. These studies are financed under a grant of the Rockefeller Foundation to the Harvard Business School for work in the general area of profits and the functioning of the economy. Much of the drafting of this study was done while the author was on a Guggenheim Fellowship in the academic year 1958-1959 and a Ford Foundation Faculty Research Professorship during 1962-1963. All this support is most gratefully acknowledged. ' literature, pro, con, or neutral, on this subject is quite extensive. Among the more recent and notable contributions (but hardly an exhaustive listing) are: W. J. Baumol, Business Value, and Growth (New York: Macmillan, 1959); A. A. Berle, The Impact of the Corporation on Classical Economic Theory, Quarterly Journal of Economics, LXXIX, No. 1 (Febr. 1965), 25-40; R. M. Cyert and J. G. March, Behavioral Theory of the Firm (Englewood Cliffs, N.J.: Prentice-Hall, 1963); C. Kaysen, Another View of Capitalism, Quarterly Journal of Economics, LXXIX, No. 1 (Febr. 1965), 41-51; R. Marris, Economic Theory of Capitalism (New York: Free Press of Glencoe, 1964); J. R. Monsen and A. Downs, A Theory of Large Firms, Journal of Political Economy, LXXIII, No. 3 (June 1965), 221-236; E. Penrose, Theory of the Growth of the Firm (Oxford: Blackwell, 1959); S. Peterson, Corporate Control and Capitalism, Quarterly Journat of Economics, LXXIX, No. 1 (Febr. 1965), 1-24; 0. E. Williamson, A Dynamic Theory of Interfirm Behavior, Quarterly Journal of Economics, LXXIX, No. 4 (Nov. 1965), 579-607. Two standard classics, that provoked much of the subsequent discussion, are: A. Berle and G. Means, Modern Corporation and Private Property (New York: Macmillan, 1932); and R. A. Gordon, Business Leadership in the Large Corporation (Washington: Brookings Institution, 1945, and Berkeley: University of California Press, 1961). more modern look at some of these same problems is to be found in J. K. Galbraith, New Industrial State (Boston: Houghton Mifflin, 1967). Finally, concise summaries and useful further bibliography can be found in C. A. Hickman, Managerial Motivation and the Theory of the Firm, American Economic Review, XLV (May 1955), 544-554; A. G. Papandreou, Some Basic Problems in the Theory of the Firm, in B. F. Haley, ed., Survey of Contemporary Economics, Vol. II (Homewood, Ill., 1952) and the comments by E. S. Mason and R. B. Heflebower therein; and R. B. Heflebower, The Firm in Oligopoly Analysis, Weltwertschaftliches Archio, 84 (1960), 150-164. 2 J. Meyer and E. Kuh, Investment Decision (Cambridge, Mass., 1957), ch. VI.

IN order to overcome the harmful effects on regression and correlation estimates of using highly collinear time series observations, and in order to obtain more accurate estimates of income elasticities of demand, economic statisticians have turned increasingly to the device of extraneous estimators. This technique has been most commonly employed in demand studies but also could be used in other applications. In the case of demand functions the procedure has been to obtain the income coefficient from cross-section budget data for which the price variables are presumably constant. Thus an estimate of the partial regression of quantity on income, with price given, is obtained. This cross-section estimate of the income regression-coefficient is then multiplied by the time-series aggregate of income, and the product is in turn subtracted from the annual time series of quantity demanded, to form a new dependent variable. This new dependent variable, as a possibly unintended consequence, usually has a larger variance than the original dependent series, which often displays little variation beyond the simplest trend component. Having been thus corrected, the dependent series is then regressed against the time series of the price variables to obtain an estimate of the price elasticity of demand.' It should be fairly clear that when the purpose is to make short-run forecasts, the described techniques often may be unnecessary and in many instances could actually prove harmful.2 Specifically, someone making forecasts need not be especially worried about multicollinearity. If some of the explanatory variables are multicollinear, the prediction interval obtained from such a set of observations will be quite large. By eliminating a number of the collinear variables it will usually be possible to substantially reduce the prediction interval for given values of included independent variables. Of course, while the elimination of collinear explanatory variables will tend to reduce the prediction interval, the actual prediction, by hypothesis, will change very little. Hence the pragmatic forecaster might be indifferent to the extent of collinearity, while the more sophisticated forecaster will not be indifferent; both will make similar forecasts and the actual errors of the forecast will be approximately the same. The combined use of cross-section and timeseries data is therefore intended to overcome multicollinearity (which entails the arbitrary splitting up of the influence of the explanatory variables) in order to obtain structurally mnore accurate estimates of the various coefficients. The question, however, can legitimately be asked: Exactly what structure does the statistician seek to estimate? Insofar as demand studies are concerned, it is quite possible, as will shortly be argued at length, that the kind of behavior measured from cross-section * For helpful comments and discussions on an earlier draft of this paper, we are indebted to John S. Chipman, Gregory Chow, James S. Duesenberry, John Lintner, Guy H. Orcutt, Robert Solow, and Charles Zwick. The authors were aided in preparing this paper by research grants from the School of Industrial Management, Massachusetts Institute of Technology, and Division of Research, Harvard Business School (under a Rockefeller Foundation grant for a Study of Profits and the Functioning of the Economy). 'While the techniques used differ in some important respects, the rationale is fully explained in each of the following sources: Richard Stone, The Measurement of Consumers' Expenditure and Behavior in the United Kingdom 1920-1938 (Cambridge, England, I954); and particularly J. Durbin, Note on Regression When There is Extraneous Information About One of the Coefficients, Journal of the American Statistical Association, xLvm (December I953), 799-808; Herman Wold and Lars Jureen, Demand Analysis (New York, I953). This method has also been used by J. Tobin, Statistical Demand Function for Food in the U.S.A., Journal of the Royal Statistical Society, Series A, cxiII (Part II I950), II3-4I. A comprehensive review article, William C. Hood, Empirical Studies of Demand, Canadian Journal of Economics and Political Science, xxi (August I955), 309-27, provides a worthwhile reference on the subject. The distinction between longand short-run estimates is to be found in the useful paper by Richard J. Foote, Price Elasticity of Demand for Nondurable Goods with Emphasis on Food, Agricultural Marketing Service Bulletin 96, USDA (Washington, D.C., I956). 'Although none of the people who have used the combined techniques has had short-run forecasting as his immediate goal, it seems useful to indicate how such prediction fits into the scheme of possible objectives.