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The options-based approach to studying irreversible investment under uncertainty emphasizes that the opportunity cost of investment includes the value of the option to wait that is extinguished when an investment is undertaken. Thus, the investment decision is affected by the determinants of the value of this option. We extend and generalize a standard model of irreversible investment by introducing a second fully reversible technology, and also incorporate partial reversibility by allowing capital to be abandoned at a cost. As in the existing literature, we find that the threshold value of the “underlying asset” (in our case, demand) at which investment takes place is increasing in the uncertainty of demand. We also find that the value of the option and thus the threshold value of the option value multiple at which investment takes place may be either increasing or decreasing in the uncertainty of demand. In addition, we find that for the case in which capital is used to replace the reversible technology, the threshold value of the option value multiple is insensitive to the degree of reversibility of capital.

This paper analyzes investment behaviour in Malawi's private and public goods sectors between 1967 and 1988, taking into account partial liberalization and contractionary fiscal and monetary policies associated with the IMF-supported structural adjustment program. Numbers of studies on investment demand in developing countries have focused on whether or not public investment crowds out private investment. Public investment may compete with private investment for scarce physical and financial resources, at least in the short term. However, public investment is also expected to complement private investment by creating infrastructure and raising the productivity of private capital stock. Partial liberalization is expected to have a negative effect in the short-run on private investment due to inflationary pressure. Contractionary fiscal and monetary policies are expected to have a negative effect on public investment. II. THE ANALYSIS In this study, factors influencing both private and public investment are investigated, and the hypothesis that public investment affects private investment is tested. A variant of the neoclassical flexible accelerator model discussed by Haque, Lahiri, and Montiel (1990) is applied. Private investment is specified as a function of the price of capital relative to the wage rate, real output and the beginning-of-period capital stock. Due to difficulties with the measurement of capital stock in developing countries and the expected influence of public investment on private investment, the estimating model is modified. Following Blejer and Khan (1984), the desired stock of capital is assumed to be proportional to expected output and an adaptive expectations framework as suggested by Cagan (1956) is used to

Much of the current debate on the economic performance impacts of public infrastructure investment relates to the input-specific effects of such investment. In this article we explore these impacts by evaluating substitution patterns affecting private input use in New England manufacturing. Using a cost-based methodology, we find that, in the short run, public capital expenditures provide cost-saving benefits that exceed the associated investment costs due to substitutability between public capital and private inputs. Over time, however, stimulating investment in private capital increases economic performance more effectively than public capital expenditures alone and in fact reduces the cost incentive for such expenditures. In addition, growth in output motivated by infrastructure investment increases employment opportunities because this growth overrides short-run substitutability.

This paper studies the responsiveness of firm investment to shocks in the input factor and output prices (the market conditions) by using stock market information on excess returns. The 'q' theory of investment is modified to allow for heterogeneous capital, ex post inflexible technology, and irreversible investment. A structural model linking the excess returns to a firm's equity to the firm's investment history and the evolution of the market conditions is estimated using a panel of U.S. manufacturing firms. The estimates of the cost of adjusting tile capital stock are economically sensible. They imply a high degree of sensitivity of investment to fundamental variables that affect the profitability of capital such as the market conditions and the purchase price of capital. Copyright 1995 by MIT Press.

Baiman and Rajan use the joint forces of relationship-specific investment and incomplete contracting to model a principal's choice between a centralized organization, where he decides the level of investment in a capital asset, and a decentralized organization, where those decision rights are contractually assigned to the agent. When contract incompleteness prevents the principal from committing to a level of capital investment, his ex post incentive to underinvest in the capital asset causes an inefficient mix of capital and labor. The principal can eliminate the inefficiency resulting from his own opportunistic behavior by assigning the capital investment decision to the agent, but the agent will overinvest in the capital asset in order to reduce his personal cost of effort when he is given the decision rights. As a result, the principal's centralizationdelegation choice is essentially a choice between the inefficiency resulting from the principal's opportunistic underinvestment of capital and the inefficiency resulting from the agent's incentive to minimize his effort by overinvesting in capital. Some type of contract incompleteness is necessary for the organizational form to matter. Baiman and Rajan assume that the agent's compensation cannot depend on the realization of a state variable, 0, which determines the efficient mix of capital and labor. However, the agent

In the last two decades productivity has lagged in the United States, markets have been lost to foreign competition, real income per capita has grown slowly. This experience has led to considerable discussion of possible causes [7]. One possible cause often mentioned is the quality of managerial investment decisions. Managers have been accused of overinvesting in obsolete technologies, of underinvesting in risky projects with long run payoffs, of undertaking unprofitable mergers, and of overall poor judgment in their investment policies [39]. This paper presents evidence on the returns on investment over the 1970-88 period for a sample of 699 large corporations that is consistent with this view.

This note investigates the effect of an increase in the wage on investment and employment when demand is uncertain, and when incentives to factor substitution arise from the existence of different vintages of capital equipment. It is shown that the effect on investment is nonmonotonic and depends on the relative likelihood of demand and supply constraints. Moreover, a wage increase can have an ambiguous effect on employment, raising it in some states while reducing it in others. The effect on the expectation of employment may be positive. The model of investment presented here relates most closely to the work of Albrecht and Hart (1983), Artus and Muet (1984), Lambert and Mulkay (1987) and Moene (1985), who assume a putty-clay technology, a fixed output price, and stochastic demand. The innovation in this note is that incentives to factor substitution arise from the existence of different vintages of installed capital equipment, rather than ex ante substitutability. Investment is undertaken to economize on labour costs by replacing older equipment and to meet additional demand. Higher wages reduce the return to incremental investment in supply-constrained states, by reducing the absolute profit margin. However, a wage increase raises the return to incremental investment in demand-constrained states. Since additional output cannot be sold, new equipment can only be used for replacing older vintages and economizing on labour costs. This return depends on the difference in labour costs between old and new equipment, which is greater with higher wages. Hence a wage increase reduces the return to incremental investment if supply-constrained states are more likely, but raises *A first draft of this paper was written while I was visiting the World Institute for Develop

The authors extend the theory of human capital investment under uncertainty by incorporating postinvestment labor supply as a choice variable. They show that human capital investment decreases in response to an increase in risk about its return if such investment is an inferior activity and preferences exhibit decreasing risk aversion. However, if investment is normal, then the effect of an increase in risk is indeterminate. These results highlight the importance of obtaining empirical evidence on the income elasticity of demand for human capital investment for arriving at refutable hypotheses about the effect of risk. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The analysis has shown that insurer investment performance parallels that of other investors; greater returns are associated with greater variability. However, with the acquisition of higher levels of investment risk insurers generally reduce the level of underwriting risk which is undertaken. Thus, insurer management apparently attempts to keep ruin probabilities within some undefinable but clearly present limits. In the process of trading off between investment and underwriting risk, a higher rate of return to net worth is sacrificed.The sacrifice of potentially higher rates of return to equity, however, does not place the insurer at a disadvantage relative to the capital market or make attractive the alternative of operating as an investment trust. Under reasonable conditions governing the risk and return associated with underwriting activities, the insurer return to net worth is in a more efficient position as the result of underwriting activities than that offered by the capital market alone. For a given risk position, the return to the insurer exceeds that available from the capital market alone. Thus, so long as marginal returns to underwriting are positive, the leveraging afforded by the expansion of premium volume produces a superior return over the traditional leveraging which might be employed by an investor in the capital market.

This paper develops an economic theory of replacement investment that can provide a basis for specifying an econometric model of investment behavior. The long-run and short-run effects of changes in the interest rate and in tax laws are examined. The paper also investigates several reasons why the common assumption of a technologically constant rate of replacement is incorrect even as an asymptotic limit. LARGE VARIATIONS in capital spending continue to motivate econometric studies of investment behavior. The past decade has seen the development of attempts to model net investment as the adjustment of the capital stock to a desirable level. Building on earlier work by Lutz [35], Haavelmo [21], and others, Jorgenson and his collaborators (e.g. [24, 28, 31, and 33]) have provided an operational model of net capital accumulation that relates desired capital to the cost of capital services. Although serious objections have been raised about the specification of the optimal capital stock (including [5, 9, 13, and 15]) and about the arbitrary nature of the adjustment dynamics [37], it is likely that some form of this general model will continue to provide a framework for future investment studies. In contrast to these developments of a theory of capital expansion, replacement investment continues to be analyzed in terms of a non-economic model of technical necessity. Jorgenson and others have adopted the simplifying assumption that replacement investment is a constant proportion of the capital stock.2 This assumption has been challenged and contrary evidence has been offered by Feldstein and Foot [14] and Eisner [10]. The purpose of the current paper is to examine several aspects of a theory of replacement investment. We hope not only to show that a model with a constant replacement rate is implausible and unsatisfactory but also to provide a basis for better empirical work in the future. The magnitude of replacement investment (the annual rate of replacement investment generally exceeds expansion investment) makes this issue a matter of substantial importance.

Choosing to participate in a TDA program is a complex decision involving many criteria. This paper focuses attention on one criterion - the rate of return during the accumulation period. A TDA investment is compared to a non-TDA investment given changing assumptions about marginal tax rates during the period of contribution and at withdrawal. The analysis shows that the TDA investment dominates the non-TDA investment except in some narrowly defined cases. Making a decision to invest in a Tax Deferred Annuity (TDA), if one is eligible to do so, involves consideration of such criteria as: financial flexibility, safety of principal, and, of course, the return on the investment. This paper addresses and analyzes the last criterion, financial return.* This study follows two earlier studies that compare TDA and non-TDA investment alternatives. Todd [5] compared the two investment alternatives in order to determine the appropriate time to begin a TDA investment. After analyzing the effect of several variables including tax rates, the author concluded, '. . . even where there is a significant increase in taxable income from current levels to retirement levels, the availability of more post-tax dollars . . . make the (TDA) a wise investment for retirement income purposes, even for younger workers.7" In the "worst case" circumstances described in the present study, the results lead to a different conclusion than the Todd study. As this study demonstrates, one may be better off in some carefully defined cases if the TDA investment is not made. Healy [3] compares the future value of a non-TDA annuity after tax to TDA accumulations. Healy's study ignores differential tax effects between pre- and post-retirement income. In order to conduct a comparative rate of return analysis between these two investment alternatives, several simplifying assumptions are made: 1) equal

Glenn P. Jenkins has argued that the price of electricity in Canada should be raised as much as 63 per cent because of an inadequate rate of return on past. utility investments. However, Jenkins calculated his recommended price from historical average utility costs, which are probably a poor representation of marginal costs. Moreover, Jenkins assumed that 10 per cent is the appropriate real rate of return on capital. Recent research suggests that the rate of return should be around 6 per cent. A major increase in the price of electricity could be damaging to economic welfare.

This paper first applies to railroads the tools of modern fiscal risk analysis, using the long-term series of holding period rates of return on railroad shares to derive a measure of industrial stagnation. This analysis is then used to gain added insights into the industry's transition from growth to stagnation. While fundamental disequilibrium produces a continuing low rate of return, railroads have succeeded in raising substantial capital on a continuing basis despite frequent bankruptcies and financial crises by resorting to financial innovations. The equipment trust certificate is cited as an example, an investment instrument which effectively shields the investor from the riskiness of enterprise. This has enabled railroads to raise debt capital at a relatively low-risk premium.

This paper is an analytic treatment of the abandonment decision in capital investment analysis. It provides a methodology which has application in obtaining better estimates for project value and risk.

After considering existing studies of hospital capital investment, this paper analyzes hospital investment with a model based on the assumption that hospitals are run to maximize the incomes of staff physicians. Optimal capital stock is shown to be related to physician income and hospital output. Analysis of a state-aggregate cross-section indicates that investment is a lagged response to output and physician income changes, while profits are not consistently an important determinant.

THE FOCAL POINT of this dissertation is an empirical investigation of the analytical relevance of the equilibrium balanced growth model from the standpoint of long-term financing patterns in the corporate sector. Specifically, the postwar (i.e., 1950-1969) corporate sector and property share data for the United States, United Kingdom, Canada, France, and Japan are examined to determine whether any insights into the historical growth process can be gleaned from balanced growth equalities. In addition, a recursive or adjustment-periods model is constructed as an alternative explanation for the actual patterns of growth observed in the five sample countries. In the ideal balanced growth model, under conditions of Harrod-neutral technological progress, the rate of return on capital, the market cost of capital, and the growth rates of the capital stock and of total output all tend toward equality. This result emerges because competition reduces the rate of return on capital to the market interest rate (= normal rate of return) and because an amount equivalent to total profits is assumed to be saved and invested. Viewing the corporate sector as a self-contained investment unit, it was argued that, if an equilibrium balanced growth path were to be realized, all corporate sector earnings would have to be absorbed into savings and investment. That is, if the whole economy is investing at a rate equal to the property income share and if the corporate sector over time approximates a constant share of total output, then along the balanced, golden age path, the corporate sector's reinvestment rate (I/K) would have to be equal to its average profit rate (P/K). The actual satisfaction of this condition would mean that any payment of net dividends by corporations, in the aggregate, would represent a useless financial maneuver, since it would transfer investible funds out of the corporate sector. Moreover, if useable funds (i.e., funds that could be invested at rates of return equal to or above the financial cost of capital) were actually paid out, for example, to satisfy the preferences of stockholders for cash dividends instead of capital gains, then according to the Modigliani-Miller thesis, one would expect corporate managers to issue net new external capital sufficient to compensate for the loss of investible funds. The statistical data for the five sample countries revealed several interesting

We examine, in a simplified model without uncertainty, the response of a regulated firm to inflation in the cost of capital equipment. This model firm is assumed to be constrained to meet a given demand schedule, and to realize a prescribed rate of return on capital; the firm's revenue requirements include depreciation based on original cost. We explore the steady-state relationships between the firm's financial parameters (rate of return, debt ratio, payout ratio, etc.) and the rate of inflation, which follow by the use of accounting identities from the condition that inelastic demand be met; we also examine the consequences in the steady state of the additional condition that equity investors receive the return they require. We further consider a sudden jump in the rate of inflation, and show that, quite apart from considerations of capital attraction or shareholder satisfaction, this necessitates an increase in the return on capital. We show how, if the firm adjusts to increased inflation only by a gradual increase in its rate of return, holding all other parameters fixed, the necessity of meeting the given demand implies that the old shareholders, who did not foresee an increase in the rate of inflation, will, if regulation is instantaneous and exact, and the required return on equity is earned, receive a real return on their investment which is higher than they anticipated and higher than that received by the new shareholders. This effect can be traced to the use of original-cost depreciation. We then show how by adjustment of any of several parameters, i.e., the payout ratio, the debt ratio, or the balance between internal and external financing, demand can still be met while all shareholders receive exactly the real return they require. The question of whether, in the real world, such an adjustment is possible or desirable is not explored.

Jorgenson [14; 15; 16; 17; 18; 19] and associates [10; 11; 12; 22], along with others [1; 2; 3; 6; 8; 9] have discussed a neoclassical investment theory in which there is a unique input of capital services. Investment is a function of the difference between the capital stock required to provide these services (usually considered proportional to the services to be provided) and the actual capital stock. The idea that there is an optimal capital input is derived from neoclassical factor demand theory in which profit maximizing firms constrained by a "regular" or strictly quasiconcave production function employ a single unique capital input for a particular set of factor prices and output. While the neoclassical investment theory is subject to many objections [1; 27]), this paper will concentrate on a very simple one that has not been discussed. It will be argued that there is not a single desired capital stock or input of capital services for the rent-based definition of capital services neoclassical writers use. This simple observation makes irrelevant both the research on the lag structure for the adjustment of the rent measured capital stock to its desired value and the research on the costs of adjusting the rent measured aggregate capital stock to the desired value.

Presents an assessment of the economic value of the investment in a doctor of philosophy in economics. Benefits of the costs of attending school; Rates of return. (Abstract copyright EBSCO.)

The central thesis under consideration is the proposition by Messrs. Harvey Averch and Leland L. Johnson that "if the rate of return allowed by the regulatory agency is greater than the cost of capital but is less than the rate of return that would be enjoyed by the firm were it free to maximize profit without regulatory restraint, then the firm will substitute capital for the other factor of production and operate at an output where cost is not minimized."

s of Doctoral Dissertations 697 understated, post-merger earnings will be overstated and what is really a return of capital will be reported as earnings. The use of pooling conceals the full cost of the merger or acquisition and may encourage unprofitable mergers by companies interested primarily in increasing their per share earnings. This study consists of an examination of literature on merger accounting, a critical analysis of the purchase and pooling concepts of accounting for corporate mergers and acquisitions, and a review of the accounting treatment of over two hundred mergers consummated in recent years. Particular emphasis is placed on measuring the consequences of applying alternate accounting procedures to a given merger. The central conclusions of this study are: 1. The use by accountants and managements of two radically different accounting methods to record the same economic event is illogical, misleading, and should be discouraged. 2. The theoretical imperatives and conventions of contemporary accounting can be used as a foundation for developing a rational approach to recording corporate mergers and acquisitions. 3. Most mergers have the characteristics of a purchase and should be so recorded. The use of pooling should be largely discontinued. Intangibles acquired should be recorded and amortized. Recording assets at vendor's book values which exceed cost and amortizing the excess of book value over cost to income is unacceptable. 4. A merger without arm's length negotiations and having the characteristics of a genuine corporate marriage may be treated as a pooling of interests. The established criteria differentiating a pooling of interests from a purchase are subjective and irrelevant for accounting purposes. 5. The use of pooling does not charge management with an accountability of all economic resources available for the accomplishment of enterprise objectives. Although such a procedure will generally increase reported earnings and probably the company's share prices in the short run, the use of misleading accounting practices to accomplish these objectives is unequivocally rejected. This content downloaded from 157.55.39.208 on Fri, 29 Jul 2016 04:47:45 UTC All use subject to http://about.jstor.org/terms

In their recent article, Elizabeth Bailey and John Malone deduce the optimal capital-labor ratios for firms with four different management objectives (maximum profit, return on investment, sales, and output), given that these firms are subject to four types of regulatory constraint (profit no greater than a fair return on investment, on cost, on output, and profit no greater than some absolute upper bound). This note points out some flaws in their analysis, and derives the correct results by more elementary methods.

This paper reports in succinct form the findings of a study undertaken a number of years ago that sought to measure the relation between risk and rate of return and, thus, to determine an empirical basis for implementing several Supreme Court decisions (Bluefield Waterworks Case, 1923, for one) that a public utility is entitled to earnings sufficient to permit its rate of return on invested capital to be similar to those in "other business undertakings which are attended by corresponding risks and uncertainties." Defining "business" risk as functionally related to the variability of earnings, a number of hypotheses concerning rate of return and risk are tested statistically, and a reasonable and significant association is discovered between them for both a sample of industries and individual companies. The statistical model, however, explains only about a quarter of the variability in rates of return among industries and firms, suggesting that it has not captured some important determinants of business risk. The final section examines our results in the light of recent developments in the theory of financial risk.

Internal rates of return to investment in education are estimated on the basis of the marginal social product of labor instead of the observed earnings. A comparison of the shadow to the actual rates of return to investment in labor skills suggested that privately advantageous decisions with respect to investment in human capital may be very inefficient when assessed in social terms. Discrete substitution possibilities between labor skills introduced in a fixed coefficients production function gave considerably more elastic marginal productivity curves for labor, as compared to the no-substitution version of the model. The proposed methodology is illustrated by an empirical application referring to Greece for the period 1954 to 1965, and the implications of the findings are analyzed in terms of educational planning.

DETERMINATION OF THE ECONOMIC PROFITABILITY OF THE CANADIAN PACIFIC RAILWAY (CPR) AS AN INVESTMENT PROJECT IS DISCUSSED, INCLUDING THE AMOUNT AND NECESSITY OF SUBSIDIES AWARDED TO THE CPR BY THE GOVERNMENT OF CANADA. THE ECONOMIC PROFITABILITY OF THE TRANSCONTINENTAL RAILWAY PROJECT WAS DETERMINED BY ESTIMATING THE PRIVATE RATE OF RETURN ON ACTUAL INVESTMENT IN THE CPR. THE RATE OF RETURN CALCULATIONS WERE EMPLOYED TO TEST THE VALIDITY OF THE ASSUMPTION THAT A SUBSIDY WAS NECESSARY TO INDUCE CONSTRUCTION BY A PRIVATE COMPANY. THE NECESSARY SUBSIDY "EX POST" IS TAKEN TO BE THAT PORTION OF THE TOTAL CASH COSTS OF CONSTRUCTION REQUIRED TO RAISE THE REALIZED PRIVATE RATE OF RETURN ON THE CONTRIBUTION OF PRIVATE INVESTORS TO AT LEAST THE NORMAL RATE IN ALTERNATIVE INVESTMENTS. THE POLITICAL OR SOCIAL NECESSITY OF THE RAILROAD ARE NOT QUESTIONED. IT IS CONCLUDED THAT A LARGER THAN NECESSARY SUBSIDY WAS PAID. /BPR/

Insurance buyers frequently ask what rate of return they earn on the money they save with a life insurance company. Part of the difficulty in answering their question arises from the fact that part of their outlay is for protection. Since the cash value and dividend schedules of the policies are non-linear, the computation is more difficult. Although others have described, in general terms, a methodology for solving this problem, this paper develops a general formula in specific terms for making the rate-ofreturn computation. The model set forth herein can be easily programed for any electronic computer. The purchaser of life insurance may choose from a vast array of companies1 and within each company he is faced with a variety of plans which carry different premiums. A very small sample of this phenomenon is that a male, age 35, may secure a $10,000 life insurance policy from one of the 1,624 companies on any of the following plans and premiums: 5-Year Term $ 65.80 per year 10-Year Term $ 70.30 per year Straight Life $188.20 per year 20-Payment Life $290.30 per year Life Paid Up At Age 65 $212.40 per year 20-Year Endowment $448.90 per year In all of the above plans, the purchaser Stuart Schwarzschild, Ph.D., C.L.U., C.P.C.U., is Professor of Insurance at Georgia State College. Dr. Schwarzschild had ten years of active service in the U.S. Army, following which he was a Fellow in the Huebner Foundation. This paper was submitted in February, 1967. The work was supported by a grant from the School of Business Administration, Georgia State College. ' In 1965 there were 1,624 life insurance companies, according to the Life Insurance Fact Book, 1966, (New York: Institute of Life Insurance, 1966), p. 97. is receiving a policy which will pay $10,000 if he dies that year. Thus part of what he pays is a current expenditure for this death benefit. The differentials above the lowest premium represent capital expenditures which will in time provide other benefits.2 The rate-of-return method is accepted as being one of two theoretically correct methods of evaluating proposals for capital expenditures.3 Several factors have made the analysis of the rate of return in life insurance policies difficult. One factor is that the protection and the savings elements are combined in one face amount. Another is that the pro rata amounts of protection and savings differ from plan to plan and from year to year. Several writers have suggested an analytical technique to be used to measure the rate of return on the investment element in the contract. Thus, McGill says: The thirdand proper-method of calculating the yield on an endowment contract 2 Robert Johnson, Financial Management, 2nd ed., (Boston: Allyn & Bacon, 1962), p. 174.

It is generally believed that the London new issue market in the years before 1914 was relatively unimportant as a source of funds for home investment. Tbus Cairncross remarks that " The London Stock Exchange was of minor importance [for home investment] except for issues by the British government, corporations and existing companies, particularly railways ",' and Paish comments on ' the small scale of the new issue market in home securities" 2 That this view is so widely accepted is no doubt a tribute to the lasting qualities of Lavington's survey of the English capital market which, after more than a generation, is still required reading for students in this field, for it is to his analysis of the new issue market in the years immediately preceding 1914 that most subsequent writers have turned when considering this question.3 It is true, of course, that the above description of the role of the London miarket for home issues applies to the particular period with which Lavington was almost wholly concerned, especially to the years 1911-3, which provide the statistical data to illustrate his argument. If, however, Lavington had been writing a decade or so earlier and had used, for instance, data relating to the years 1896-8, he would have come to quite different conclusions about the relative importance of home and foreign issues and about the volume of funds flowing through the home new issue market. This, of course, is hardly a strong criticism of Lavington himself, who was concerned to examine the market at a particular period of time. The way in which his generalisations have been applied by later writers to the " pre-1914 capital market " is, however, a reflection on their historical sense. In particular, since the publication of Cairncross's study of the long-term inverse movements of home and foreign investment there has been little excuse for the application of Lavington's view of the market to the whole of the period from say 1870 to 1914. While the London market was by no means perfect, it was not so imperfect that it did not reflect quite significantly these underlying major flows of real investment. Indeed, it would have been quite surprising if it had not reflected them, particularly in the middle 1870's and for most of the

This paper presents an attempt to specify and estimate a simple model of the rate of return phase of a formal regulatory hearing. The specification of the model derives from the author's intensive study of the regulatory decision-making process in New York State. Although well-defined legal rules for the calculation of the allowed rate of return have not evolved in most regulatory jurisdictions, the results indicate that the regulatory agency, in a consistent fashion, makes use of the information provided to it in the regulatory hearing. The rate of return allowed by the commission is shown to depend on the size and relative reasonableness of the firm's request, the presence or absence of cost of capital testimony supporting the firm's request, the presence or absence of intervenors presenting conflicting rate of return testimony, the type of firm making the rate of return request, and a subjective evaluation of the efficiency of the firm making the request. The results also suggest that commission behavior changes in response to problems faced by the regulatory process in a world characterized by rapid inflation.

This article considers the premium, dividend, and cash value data of five life insurance companies to examine the rates of return that the purchaser of lower premium policies must receive in noninsurance investments in order to be as well off as he would be if instead he had put the same total amount of funds into higher premium policies. The examination is made under varying conditions. The policies considered are 20 year endowment, 20 year pay, ordinary life, and 20 year term. The use of the plural "rates" in the title of this paper is intentional. It is not practicable to postulate any one rate of return for the rates will vary between companies, and as will be seen, the rates are not even uniform among policies within a company. Of course, the rates will also vary if one varies the inv7estment time period, but the variation of yield with the time length of inv7estment is a well recognized economic phenomenon.1

This paper summarizes the results of two recent efforts to estimate rates of return to educational investment in Great Britain. Because there is no basic source of age-education-income data such as is available in the U.S., the analysis employs data which are by-products of several surveys conducted for other reasons. Consequently, rather extensive adjustments in the data were required. The rate-of-return results indicate that, while there is little evidence of social overinvestment in higher education, some social underinvestment appears to exist at the secondary level. However, the private rates of return tend to exceed those for alternative investment forms.

In a recent issue of this Journal, Stuart Schwarzschild developed a method for determining the investment yield required on a separate fund built up by investing the difference in premium outlays for two different kinds of life insurance policies, so that the combination of the lower premium policy and the separate fund would provide essentially the same death benefit over a specified period of time, and the same amount of cash available at the end of that time, as the higher premium policy.' The objectives of this discussion are to develop an alternate to Professor Schwarzschild's formula (16), to expand the model to allow for termination dividends and refund of premium at death, and to describe the methods used by the late M. Albert Linton in his work in this field. By way of introduction, it might be well to list some of the symbols used by Professor Schwarzschild and to define them.

General conditions are derived under which accounting ratios, such as the conventionally defined accounting rate of return, deviate from the economic rate of return for a firm. Cash revenue streams of arbitrary time-shape, non-depreciable capital, and corporate income taxes are considered. The sign and magnitude of the bias in the accounting rate of return depend upon the depreciation schedule, the revenue timestream, the firm's growth rate, and its capital structure.

In this paper, education is treated as a form of investment. No attempt is made to measure the contribution of education to economic growth. Internal rates of return to investment in education in India for the year 1960-61 are estimated and compared with Professor A. C. Harberger's estimate of the rates of return to physical capital. "Net" education capital formation during the period 1950-51 to 1960-61 is also estimated at 1960-61 prices and compared with physical capital formation during the same period. The study indicates that education is not an attractive form of investment when compared with physical capital. Within the educational system, primary education is the most attractive and collegiate nonprofessional education the least attractive form of investment. The study suggests diversion of resources in favor of physical capital.