We are delighted that Nicholas Rau has attempted to generalize our result that: the of rate of return regulation is highly sensitive to the nature of the uncertainty. His paper has stimulated us to reflect further on generalizing and simplifying our joint results. Originally, we stated the following results: a) If uncertainty affects the maximal quasi-rents function R(K, u) in a multiplicative way, R(K,u) = R(K)(1 + u), then a sufficiently large gap must exist between the regulated rate of return (s) and the cost of capital (i) to induce the firm to select ex ante a scale of plant greater than the scale chosen by the unregulated monopolist. The closer is the regulated rate to the cost of capital, the more likely is it that the regulated firm will select ex ante a smaller scale of plant than is chosen by the unregulated firm. Were that to occur, regulation would definitely be worse than no regulation. b) If the uncertainty enters the maximal quasi-rents function in an additive way, R(K,u) = R(K) + u, then the conventional Harvey Averch and Leland Johnson (A-J) occurs (unless the regulation drives it out of business). Rau's main conclusion is that: .... if the state of nature affects both the average and marginal return on capital, then whether an A-J or anti A-J prevails depends on the amount of randomness in the environment. The more 'noise,' the more likely is an anti A-J effect (p. 190). A general and simple statement of the regulation theorems is derived below which contains points a) and b) and Rau's conclusion as special cases. 1. A General Formulation of the Problem

I. The model 140.—II. Marginal effects of taxes and subsidies, 142.—III. The role of risk preferences, 143.—IV. Relative effectiveness of taxes and subsidies, 145.—V. Conclusions, 147.

The results of this study are based on a statistical analysis of post-1954 accumulated earnings cases litigated in the Tax Court. The primary purpose was to identify the variables drawn from the regulations and IRS Audit Guidelines that have discriminated cases won by taxpayers from cases lost by taxpayers. A secondary purpose was to compare the relative discriminatory power of the regulations with that of the unpublished Guidelines. Discriminant analysis, using a stepwise procedure, was performed on the 59 cases included in the study. While the variables were capable of discriminating between winning and losing cases, the IRS Guidelines proved to be the more powerful discriminators. These results have important implications for taxpayers, for the Internal Revenue Service, and for policymakers and those who wish to influence them

Coming to me as it did after almost a decade's absence from the academic profession, I accepted this invitation only with trepidation. While the profession has been extending the frontiers of economics, I have been operating deep within its margin, first discovering how dismal our science really can be as it applies to the finances of private universities, and then, during the past four years, applying to the real world economic principles that Alfred Marshall would have had no difficulty recognizing. I have no particular interest in describing the first of these experiences. Its only lessons were that' the laws of economics are truly made of iron; and that any organization that hopes to make the best use of its limited resources had better be organized more hierarchically than a university. The experience of being a practitioner of regulation, in contrast, has been immensely satisfying, because it has afforded almost unlimited opportunity for the application of simple micro-economic principles to the real world. The applicable principles are easy to characterize: that economic efficiency calls for prices equated to marginal social opportunity costs; and that, whenever it is technologically feasible, competition is the best institutional mechanism for achieving that result, as well as for minimizing X-inefficiency and ensuring the optimum rate of innovation. What has been especially intriguing about my experience is that it has embraced two quite different regulatory situations-one, the traditional public utilities, where competition seems for the most part infeasible, and the economistregulator is moved to play an active role in trying to produce efficient results; the other, airlines, in which it appears the prime obstacle to efficiency has been regulation itself, and the most creative thing a regulator can do is remove his (and her) body from the market entryway. But the process of applying these principles-even of simply getting out of the wayhas been far from simple. The slate on which the economist-regulator writes is scribbled with the scratchings of lawyers, jurists, and politicians; the world to which he would apply his principles is excruciatingly imperfect and resistant; and the compass he needs is one that would help him thread his way through the thickets of second best. The really challenging job is deciding not what the ultimate economically rational equilibrium should look like, but what is economically rational in an irrational world, and how best to get from here to there. That, too, turns out to be a kind of frontier; and life on it is full of excitement

The existence of seasonality in security rates of return has implications for both the study of market efficiency and tests involving return models. The existence of seasonal asset returns may be an indicator of market inefficiencies. In an efficient market, investor arbitrage should remove any excess seasonal return an asset receives over a comparable asset of equal risk. The presence of seasonal returns, however, does not necessitate market inefficiency. For example, an expected seasonal return may exist in an efficient market simply because of anticipated seasonal patterns embedded in its underlying determinants. Tax regulations, government monetary policy, seasonal information lags, or risk adjustments have all been advanced as determinants of seasonal movements in return. No matter what the basis for return seasonality or the extent of market efficiency, if seasonality in asset returns exists, then these returns do not follow a strict stationary process within the year. Statistical models analyzing asset returns may use this information to improve model specification. For instance, Kinney and Rozeff [16] have shown that large efficiency gains in estimating portfolio betas can be achieved using time stratified estimates which explicitly incorporate seasonality in 4 stock returns

Few, if any, proposals for a change in an accounting method have triggered such a strong and widespread reaction as did the FASB's oil and gas July, 1977, exposure draft, which proposed to put an end to the "full cost" method. Many of the arguments raised in this controversy touched on the impact of the proposed accounting change on capital markets. To provide evidence on the market impact, the behavior of stock prices of oil and gas companies was analyzed in this study. Results indicate that the release of the exposure draft was associated with a decline of about 4.5 percent, on average, in the stock prices of "full cost" companies during a period of three days succeeding the release of the exposure draft. This market reaction appears to be relevant to accounting policy makers.