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On Input Market Frictions and Estimation of Factors Demand

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  • Dupuy, Arnaud

    ()
    (CEPS/INSTEAD)

  • Sorensen, Todd A.

    ()
    (University of Nevada, Reno)

Abstract

In this paper we explore the impact of imperfectly competitive input markets on production function estimation. First order profit maximizing conditions are altered when frictions in input markets cause the elasticity of input supply to the firm to be finite. 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5881.

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Length: 14 pages
Date of creation: Jul 2011
Date of revision:
Publication status: published in: Southern Economic Journal, 2014, 80 (3), 772-782
Handle: RePEc:iza:izadps:dp5881

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Keywords: input market frictions; estimation of factor demand; labor market frictions;

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  1. David Card & Christian Dustmann & Ian Preston, 2009. "Immigration, Wages, and Compositional Amenities," NBER Working Papers 15521, National Bureau of Economic Research, Inc.
  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, University of Chicago Press, vol. 28(2), pages 291-330, 04.
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  6. David Card, 2009. "Immigration and Inequality," CReAM Discussion Paper Series 0907, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
  7. 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.
  8. Daron Acemoglu, 1998. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," NBER Working Papers 6658, National Bureau of Economic Research, Inc.
  9. Ransom, Michael R. & Oaxaca, Ronald L., 2005. "Sex Differences in Pay in a "New Monopsony" Model of the Labor Market," IZA Discussion Papers 1870, Institute for the Study of Labor (IZA).
  10. Julie L. Hotchkiss & Myriam Quispe-Agnoli, 2009. "Employer monopsony power in the labor market for undocumented workers," Working Paper, Federal Reserve Bank of Atlanta 2009-14, Federal Reserve Bank of Atlanta.
  11. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain The Rising Return To College For Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 705-746, May.
  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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