Endogenous efficiency of the dynamic profit maximization in the intertemporal production models of venture behavior

How do ventures manage adjustment costs, input elasticities, and productivity growth? We draw on the intertemporal production decisions of ventures that are quasi-fixed, costly to adjust, and endogenous. Using a modified version of the Bayesian Exponentially Tilted Empirical Likelihood (BETEL) method adjusted for the presence of dynamic latent variables, the proposed moment-based multiple-equation estimation system incorporates dynamic and static optimality conditions derived from a firm's expected intertemporal profit maximization. Using reliable tax information data from a sample of 72,035 Portuguese ventures founded between 2010 and 2017, we find that the most important inputs are labor, equity, and inventories. However, the technical change is small, as is productivity growth. Ventures have a high degree of labor input elasticity but much lower elasticities for equity, inventories, capital, and advertising. The findings provide an understanding of the intertemporal behavior of ventures in managing adjustment costs, input elasticities, and productivity growth where adjustments to efficiency are “cheaper” than adjustments to capital. Labor elasticity is the highest, and productivity growth is very small.