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On Input Market Frictions and Estimation of Factors' Demand

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  • DUPUY Arnaud
  • SORENSEN Todd

Abstract

In this paper we explore the impact of imperfectly competitive input markets on production function estimation. First order prot maximizing conditions are altered when frictions in input markets cause the elasticity of input supply to the firm to be nite. A consequence of this is that the standard econometric model used for production function estimation will be misspecified. We prove that, in all non trivial cases, finite elasticities of supply to the firm will lead to inconsistent estimates of production function parameters. Monte Carlo simulations show that the resulting bias can be economically significant.

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Bibliographic Info

Paper provided by CEPS/INSTEAD in its series CEPS/INSTEAD Working Paper Series with number 2013-13.

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Length: 24 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:irs:cepswp:2013-13

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Keywords: Input Market Frictions; Labor Market Frictions; Estimation of Factor Demand;

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  1. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Boris Hirsch & Thorsten Schank & Claus Schnabel, 2010. "Differences in Labor Supply to Monopsonistic Firms and the Gender Pay Gap: An Empirical Analysis Using Linked Employer-Employee Data from Germany," Journal of Labor Economics, University of Chicago Press, vol. 28(2), pages 291-330, 04.
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  6. David Card & Christian Dustmann & Ian Preston, 2012. "Immigration, Wages, and Compositional Amenities," Norface Discussion Paper Series 2012013, Norface Research Programme on Migration, Department of Economics, University College London.
  7. Julie L. Hotchkiss & Myriam Quispe-Agnoli, 2009. "Employer monopsony power in the labor market for undocumented workers," Working Paper 2009-14, Federal Reserve Bank of Atlanta.
  8. Dupuy,Arnaud & Marey,Philip, 2005. "Shifts and Twists in the Relative Productivity of Skilled Labor," ROA Research Memorandum 007, Maastricht University, Research Centre for Education and the Labour Market (ROA).
  9. George J. Borjas, 2003. "The Labor Demand Curve is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market," NBER Working Papers 9755, National Bureau of Economic Research, Inc.
  10. Torberg Falch, 2010. "The Elasticity of Labor Supply at the Establishment Level," Journal of Labor Economics, University of Chicago Press, vol. 28(2), pages 237-266, 04.
  11. David Card, 2009. "Immigration and Inequality," NBER Working Papers 14683, National Bureau of Economic Research, Inc.
  12. Simona Lup TICK & Ronald L. OAXACA, 2010. "Technological Change and Gender Wage Gaps in the U.S. Service Industry," Annales d'Economie et de Statistique, ENSAE, issue 99-100, pages 47-65.
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