Industry Investment and Regulation

Regulatory uncertainty may delay investment, and some implemented or expected regulatory regimes may reduce the returns to investment. Public utilities, petroleum, telecommunications, automobiles, pharmaceuticals, and other industries offer examples of the industry specific effects of regulation. Some policies, notably antitrust, affect a broader set of industries and influence a variety of business acitvity, including merger, expansion and joint venture. Case studies suggest that federal antitrust initiatives may also serve as a proxy for other regulatory threats. This paper employs a panel set of 21 major industries covering 1947-1991 to explore the effects of regulation and regulatory uncertainty on investment. It uses antitrust case filings against exchange-listed firms as a proxy for the stringency of antitrust policy and related policy initiatives. Statistically, each extra antitrust case filing is associated with a decline of investment in the same industry of between $169 and $361 million (1987 dollars), and each case overall lowers investment per industry by $34 to $110 million. Because antitrust initiatives may delay investment or serve as a proxy for other, harder-to-measure policies, these estimates do not reveal the long-run effects of antitrust taken alone. However, they do offer evidence that investment is affected by more than the traditional business cycle and tax variables. The revival of antitrust under Eisenhower and Kennedy´s confrontational business policies explain at least part of the low level of investment, 1957-1963, and renewed vigor under Nixon part of the investment decline of the 1970s. The appendix shows that first-difference methods seriously aggravate the bias stemming from errors-in-variables. ...