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Overestimating the Effect of Complementarity on Skill Demand


  • Kovak Brian K.

    () (Carnegie Mellon University)


Many recent studies estimate cost function parameters to measure the influence of capital-skill complementarity on changes in skill demand. This paper argues that standard cost function estimates assuming quasi-fixed capital systematically overestimate the effect of complementarity when subject to skill-biased technological change. While previous work has considered bias due to measurement error or general endogeneity concerns, this paper shows that upward bias results directly from cost minimizing behavior. I also develop a novel instrumental variables strategy based on the tax treatment of capital to more accurately measure the effect of complementarity. Although somewhat imprecise, the IV results support the model's prediction that the standard approach overestimates the effect of complementarity.

Suggested Citation

  • Kovak Brian K., 2011. "Overestimating the Effect of Complementarity on Skill Demand," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-25, October.
  • Handle: RePEc:bpj:bejeap:v:11:y:2011:i:1:n:65

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    References listed on IDEAS

    1. Gravelle, Jane G., 2001. "Whither Tax Depreciation?," National Tax Journal, National Tax Association, vol. 54(3), pages 513-526, September.
    2. Jane G. Gravelle, 1994. "The Economic Effects of Taxing Capital Income," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071584, July.
    3. Eve Caroli & John Van Reenen, 2001. "Skill-Biased Organizational Change? Evidence from A Panel of British and French Establishments," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1449-1492.
    4. Caves, Douglas W & Christensen, Laurits R & Swanson, Joseph A, 1981. "Productivity Growth, Scale Economies, and Capacity Utilization in U.S. Railroads, 1955-74," American Economic Review, American Economic Association, vol. 71(5), pages 994-1002, December.
    5. Daniel S. Hamermesh, 1993. "Labor Demand and the Source of Adjustment Costs," NBER Working Papers 4394, National Bureau of Economic Research, Inc.
    6. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1, January.
    7. Triest, Robert K., 1998. "Econometric Issues in Estimating the Behavioral Response to Taxation: A Nontechnical Introduction," National Tax Journal, National Tax Association, vol. 51(4), pages 761-772, December.
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