The embodiment hypothesis revisited: Evidence from the U.S. local exchange carriers

This study attempts to measure the rate of embodied technical change by using a cost function that contains arguments for labor and capital quality. The study applies several cost functions to pooled time-series and cross-section data of eight U.S. local exchange carriers (LECs). The time span encompassed by the study is 1951-1991. When a measure of competition is included as a proxy for organizational efficiency, the two quality indexes explain more than half of the rate of technical change. Results show that capital quality may have a lagged effect, while larger firms more readily transform improved capital quality into lower cost.