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Investment Behavior and the Production Function

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Author Info
Dale W. Jorgenson

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Abstract

In the economic theory of investment behavior the form of the optimal production and investment policy depends critically on the form of technology. The purpose of this paper is to select an appropriate description of technology on the basis of empirical evidence for United States manufacturing industries. The evidence is consistent with a production function characterized by elasticity of substitution equal to unity and constant returns to scale. For this description of technology the optimal policy determines an optimal rate of growth of capital and associated capital/output and labor/output ratios for any set of prices of output, labor input, and capital input. The desired level of capital is a perpetually moving target to which actual capital never converges. The corresponding model of investment policy has been employed extensively in econometric studies of investment behavior. Characterization of the form of optimal investment policy makes it possible to resolve the considerable controversy over the interpretation of econometric models of investment.

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Publisher Info
Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 3 (1972)
Issue (Month): 1 (Spring)
Pages: 220-251
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Handle: RePEc:rje:bellje:v:3:y:1972:i:spring:p:220-251

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  1. Joseph Dragonette, 1983. "Returns to Scale: Some Time Series Evidence," Eastern Economic Journal, Eastern Economic Association, vol. 9(1), pages 23-27, Jan-Mar. [Downloadable!]
  2. Hyunbae Chun & Sung-Bae Mun, 2005. "The Structure of Adjustment Costs in Information Technology Investment," Economics Bulletin, Economics Bulletin, vol. 5(4), pages 1-9. [Downloadable!]
  3. Voxi Heinrich S Amavilah & Richard T. Newcomb, 2004. "Economic Growth and the Financial Economics of Capital Accumulation under Shifting Technological Change," GE, Growth, Math methods 0404001, EconWPA. [Downloadable!]
  4. Martin Williams, 1984. "The structure of production in the United States textile industry: The post-war period," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 120(1), pages 155-164, March. [Downloadable!] (restricted)
  5. Fischer Black, 1982. "General Equilibrium and Business Cycles," NBER Working Papers 0950, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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