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Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period

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Kazuo Ogawa

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Abstract

This paper examines empirically some of the reasons why Japanese manufacturing firms frequently fail to satisfy concavity conditions of the cost function. We focus on the "bubble period" in the 1980s when land was in great demand for reasons related to both production and speculation, and land prices soared. By estimating the translog cost function with land as one of production inputs for manufacturing firms, we find that violation of concavity resulted from borrowing constraints and large adjustments of employment. We also demonstrate that elasticities of substitution between land and other inputs and input demand with respect to land rental prices are both estimated with large biases if the firms violating concavity are not excluded from the analysis.

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File URL: http://www.iser.osaka-u.ac.jp/library/dp/2008/DP0719.pdf
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Paper provided by Institute of Social and Economic Research, Osaka University in its series ISER Discussion Paper with number 0719.

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Date of creation: Sep 2008
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Handle: RePEc:dpr:wpaper:0719

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  1. Ogawa, Kazuo & Kitasaka, Shin-ichi & Yamaoka, Hiroshi & Iwata, Yasuharu, 1996. "Borrowing Constraints and the Role of Land Asset in Japanese Corporate Investment Decision," Journal of the Japanese and International Economies, Elsevier, vol. 10(2), pages 122-149, June. [Downloadable!] (restricted)
  2. Ryan, David L. & Wales, Terence J., 2000. "Imposing local concavity in the translog and generalized Leontief cost functions," Economics Letters, Elsevier, vol. 67(3), pages 253-260, June. [Downloadable!] (restricted)
  3. Ogawa, K. & Suzuki K., 1996. "Demand for Bank Loans Under Borrowing Constraints: A Panel Study of Japanese Firm Data," Papers 409, Osaka - Institute of Social and Economic Research.
  4. Chew Chua & Hsein Kew & Jongsay Yong, 2005. "Airline Code-share Alliances and Costs: Imposing Concavity on Translog Cost Function Estimation," Review of Industrial Organization, Springer, vol. 26(4), pages 461-487, 06. [Downloadable!] (restricted)
  5. Ogawa, K. & Suzuki, K., 1996. "Land Value and Corporate Investment: Evidence from Japanese Panel Data," Papers 408, Osaka - Institute of Social and Economic Research.
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