Factor Demands, Cost Functions, and Technology Measurements for Regulated Firms.

In this paper, the authors provide some missing elements to the theory of the regulated firm and discuss implications for econometric specification. Particular attention is paid to situations where capital is quasi-fixed under rate-of-return regulation, which may lead to serious specification and interpretation errors if the current theoretical basis is not adjusted. The authors also extend the analysis to arbitrary types of regulation and indicate precisely how the differential of factor demands can be specified and what regularity conditions it must satisfy. The exact formula for the calculation of marginal products, returns to scale, and technological change are derived.