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On Input Market Frictions and Estimation of Factors' Demand

  • Arnaud Dupuy


    (CEPS/INSTEAD, 3 avenue de la Fonte, L-4364 Esch-sur-Alzette, Luxembourg; and Maastricht School of Management;)

  • Todd Sorensen


    (?Department of Economics, University of California, Riverside, 4128 Sproul Hall, 900 University Avenue, Riverside, CA 92521; USA; corresponding author)

In this article, 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 nontrivial 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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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 80 (2014)
Issue (Month): 3 (January)
Pages: 772-781

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Handle: RePEc:sej:ancoec:v:80:3:y:2014:p:772-781
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