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Dynamic Factor Demand Models, Productivity Measurement, and Rates of Return: Theory and an Empirical Application to the U.S. Bell System

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  • M. Ishaq Nadiri
  • Ingmar R. Prucha

Abstract

Prucha and Nadiri (1982,1986,1988) introduced a methodology to estimate systems of dynamic factor demand that allows for considerable flexibility in both the choice of the functional form of the technology and the expectation formation process. This paper applies this methodology to estimate the production structure, and the demand for labor, materials, capital and R&D by the U.S. Bell System. The paper provides estimates for short-, intermediate- and long-run price and output elasticities of the inputs, as well as estimates on the rate of return on capital and R&D. The paper also discusses the issue of the measurement of technical change if the firm is in temporary rather than long-run equilibrium and the technology is not assumed to be linear homogeneous The paper provides estimates for input and output based technical change as well as for returns to scale. Furthermore, the paper gives a decomposition of the traditional measure of total factor productivity growth.

Suggested Citation

  • M. Ishaq Nadiri & Ingmar R. Prucha, 1989. "Dynamic Factor Demand Models, Productivity Measurement, and Rates of Return: Theory and an Empirical Application to the U.S. Bell System," NBER Working Papers 3041, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3041
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    1. Ingmar R. Prucha & M. Ishaq Nadiri, 1982. "Formulation and Estimation of Dynamic Factor Demand Equations Under Non-Static Expectations: A Finite Horizon Model," NBER Technical Working Papers 0026, National Bureau of Economic Research, Inc.
    2. Zvi Griliches, 1998. "Productivity Growth and R&D at the Business Level: Results from the PIMS Data Base," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 134-156, National Bureau of Economic Research, Inc.
    3. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
    4. Pierre A. Mohnen & M. Ishaq Nadiri & Ingmar R. Prucha, 1984. "R&D, Production Structure, and Productivity Growth in the U.S., Japaneseand German Manufacturing Sectors," NBER Working Papers 1264, National Bureau of Economic Research, Inc.
    5. Lau, Lawrence J., 1976. "A characterization of the normalized restricted profit function," Journal of Economic Theory, Elsevier, vol. 12(1), pages 131-163, February.
    6. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
    7. Prucha, Ingmar R. & Nadiri, M. Ishaq, 1986. "A comparison of alternative methods for the estimation of dynamic factor demand models under non-static expectations," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 187-211.
    8. Prucha, Ingmar R. & Nadiri, M. Ishaq, 1988. "On the computation of estimators in systems with implicity defined variables," Economics Letters, Elsevier, vol. 26(2), pages 141-145.
    9. Morrison, Catherine J., 1986. "Productivity measurement with non-static expectations and varying capacity utilization : An integrated approach," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 51-74.
    10. Lars Peter Hansen & Thomas J. Sargent, 1980. "Linear rational expectations models for dynamically interrelated variables," Working Papers 135, Federal Reserve Bank of Minneapolis.
    11. Hulten, Charles R., 1986. "Productivity change, capacity utilization, and the sources of efficiency growth," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 31-50.
    12. Morrison, C. J. & Berndt, E. R., 1981. "Short-run labor productivity in a dynamic model," Journal of Econometrics, Elsevier, vol. 16(3), pages 339-365, August.
    13. Bitros, George C & Kelejian, Harry H, 1976. "A Stochastic Control Approach to Factor Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(3), pages 701-717, October.
    14. Kollintzas, Tryphon, 1986. "A non-recursive solution for the linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 10(1-2), pages 327-332, June.
    15. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers," Economic Journal, Royal Economic Society, vol. 92(365), pages 73-86, March.
    16. Nadiri, M Ishaq & Schankerman, M A, 1981. "Technical Change, Returns to Scale, and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 71(2), pages 314-319, May.
    17. Epstein, Larry G. & Yatchew, Adonis J., 1985. "The empirical determination of technology and expectations : A simplified procedure," Journal of Econometrics, Elsevier, vol. 27(2), pages 235-258, February.
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    Cited by:

    1. James R. Hines, Jr., 1994. "No Place like Home: Tax Incentives and the Location of R&D by American Multinationals," NBER Chapters, in: Tax Policy and the Economy, Volume 8, pages 65-104, National Bureau of Economic Research, Inc.
    2. Pierre Mohnen, 1999. "Tax Incentives: Issue and Evidence," CIRANO Working Papers 99s-32, CIRANO.
    3. Giannis Karagiannis & George Mergos, 2000. "Total Factor Productivity Growth and Technical Change in a Profit Function Framework," Journal of Productivity Analysis, Springer, vol. 14(1), pages 31-51, July.
    4. Gordon, Stephen, 1996. "How long is the firm's forecast horizon?," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1145-1176.
    5. Elena Ketteni, 2009. "Information technology and economic performance in U.S industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 42(3), pages 844-865, August.
    6. Nadiri, M. Ishaq & Prucha, Ingmar R., 1997. "Sources of growth of output and convergence of productivity in major OECD countries," International Journal of Production Economics, Elsevier, vol. 52(1-2), pages 133-146, October.
    7. Nadiri, M. Ishaq & Nandi, Banani, 1997. "The changing structure of cost and demand for the U.S. telecommunications industry," Information Economics and Policy, Elsevier, vol. 9(4), pages 319-347, December.
    8. M. Ishaq Nadiri, 1993. "Innovations and Technological Spillovers," NBER Working Papers 4423, National Bureau of Economic Research, Inc.
    9. Marcel Dagenais & Pierre Mohnen & Pierre Therrien, 1997. "Do Canadian Firms Respond to Fiscal Incentives to Research and Development?," CIRANO Working Papers 97s-34, CIRANO.
    10. Bloch, Harry & Tang, Sam Hak Kan, 2007. "The effects of exports, technical change and markup on total factor productivity growth: Evidence from Singapore's electronics industry," Economics Letters, Elsevier, vol. 96(1), pages 58-63, July.
    11. M. Ishaq Nadiri & Ingmar Prucha, 2001. "Dynamic Factor Demand Models and Productivity Analysis," NBER Chapters, in: New Developments in Productivity Analysis, pages 103-172, National Bureau of Economic Research, Inc.
    12. Wei Wei & Qiao Fan & Aijun Guo, 2022. "China’s Industrial TFPs at the Prefectural Level and the Law of Their Spatial–Temporal Evolution," Sustainability, MDPI, vol. 15(1), pages 1-21, December.
    13. Elena Ketteni & Theofanis Mamuneas & Panos Pashardes, 2013. "ICT and Energy Use: Patterns of Substitutability and Complementarity in Production," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 7(1), pages 63-86, June.
    14. Prucha, Ingmar R. & Nadiri, M. Ishaq, 1996. "Endogenous capital utilization and productivity measurement in dynamic factor demand models Theory and an application to the U.S. electrical machinery industry," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 343-379.
    15. Pierre Lasserre & Pierre Ouellette, 1999. "Dynamic Factor Demands and Technology Measurement under Arbitrary Expectations," Journal of Productivity Analysis, Springer, vol. 11(3), pages 219-241, June.
    16. Khayyat, Nabaz T. & Lee, Jongsu & Lee, Jeong-Dong, 2014. "How ICT Investment Influences Energy Demand in South Korea and Japan?," MPRA Paper 55454, University Library of Munich, Germany.
    17. Nemoto, Jiro & Asai, Sumiko, 2002. "Scale economies, technical change and productivity growth in Japanese local telecommunications services," Japan and the World Economy, Elsevier, vol. 14(3), pages 305-320, August.
    18. James R. Hines, Jr. & R. Glenn Hubbard & Joel Slemrod, 1993. "On the Sensitivity of R&D to Delicate Tax Changes: The Behavior of U. S. Multinationals in the 1980s," NBER Chapters, in: Studies in International Taxation, pages 149-194, National Bureau of Economic Research, Inc.

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