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The Specification of Dynamics in Cost Function and Factor Demand Estimation

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  • Kolstad, Charles D
  • Lee, Jong-Kun

Abstract

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.

Suggested Citation

  • Kolstad, Charles D & Lee, Jong-Kun, 1993. "The Specification of Dynamics in Cost Function and Factor Demand Estimation," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 721-726, November.
    • Handle: RePEc:tpr:restat:v:75:y:1993:i:4:p:721-26
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    Cited by:

    1. Chakrabarti, Avik, 2004. "Asymmetric adjustment costs in simple general equilibrium models," European Economic Review, Elsevier, vol. 48(1), pages 63-73, February.
    2. Chakrabarti, Avik & Mitra, Rajarshi, 2010. "Skilled-unskilled wage inequality and offshore outsourcing with asymmetric adjustment costs," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 340-345, April.
    3. Atkinson, Scott E. & Halvorsen, Robert, 1998. "Parametric tests for static and dynamic equilibrium," Journal of Econometrics, Elsevier, vol. 85(1), pages 33-50, July.

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