A note on the effect of rate-of-return regulation under uncertainty

This paper corrects the errors of Peles and Stein's capital-setting (i.e., capital is ex-ante) model and Das' quantity-setting (i.e., all inputs are ex-ante) model. It also shows that rate-of-return regulated firms always overcapitalize in the quantity-setting case, but may overcapitalize, undercapitalize or produce efficiently in the capital-setting case.