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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

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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Suggested Citation

  • Kazuo Ogawa, 2011. "Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(4), pages 556-580, August.
    • Handle: RePEc:bla:obuest:v:73:y:2011:i:4:p:556-580
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    Cited by:

    1. Laura Spierdijk & Sherrill Shaffer & Tim Considine, 2016. "Adapting to Changing Input Prices in Response to the Crisis: The Case of U.S. Commercial Banks," CAMA Working Papers 2016-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Song, Ze & Li, Lianyou & Ma, Chao, 2013. "The EASI Demand System : Evidence from China Household," MPRA Paper 48435, University Library of Munich, Germany.
    3. Yingzhuo Yu & Cesar Escalante & Xiaohui Deng & Jack Houston & Lewell Gunter, 2011. "Analysing scale and scope specialization efficiencies of US agricultural and nonagricultural banks using the Fourier flexible functional form," Applied Financial Economics, Taylor & Francis Journals, vol. 21(15), pages 1103-1116.
    4. Li, Lianyou & Song, Ze & Ma, Chao, 2015. "Engel curves and price elasticity in urban Chinese Households," Economic Modelling, Elsevier, vol. 44(C), pages 236-242.
    5. Andrés Ramírez‐Hassan, 2021. "Bayesian estimation of the exact affine Stone index demand system: Replicating the Lewbel and Pendakur (2009) results," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(4), pages 484-491, June.
    6. Shahiduzzaman, M.D. & Alam, Khorshed, . "Interfuel substitution in Australia: a way forward to achieve environmental sustainability," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 58(01).
    7. Wan, Junmin, 2024. "Transmission of housing bubbles among industrial sectors," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 692-701.
    8. Anupriya, & Graham, Daniel J. & Carbo, Jose M. & Anderson, Richard J. & Bansal, Prateek, 2020. "Understanding the costs of urban rail transport operations," Transportation Research Part B: Methodological, Elsevier, vol. 138(C), pages 292-316.

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