This paper concerns the problem of properly specifying the dynamic structure of models of industry costs and factor demands. The paper compares three common frameworks: long-run costs with all factors assumed in equilibrium (Full Static Equilibrium), short-run costs with variable factors in short-run equilibrium (Partial Static Equilibrium) followed by computation of long-run costs, and short-run costs including internal capital adjustment costs (Partial Dynamic Equilibrium). The approach of the paper is to estimate a capital-labor-fuel-electricity model for six OECD countries (G7 less Italy) for the 1960-1989 period. Using the three different 'dynamic' specifications, we obtain substantially different results in terms of factor demand, cross-price effects and technical change. The implication is that proper dynamic specification is critical. The Partial Dynamic Equilibrium model appears to behave most consistently across the cross-section. Copyright 1993 by MIT Press.
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Volume (Year): 75 (1993) Issue (Month): 4 (November) Pages: 721-26 Download reference. The following formats are available: HTML
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