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On Input Market Frictions and Estimation of Factors' Demand

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  • Arnaud Dupuy
  • Todd Sorensen

Abstract

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.

Suggested Citation

  • Arnaud Dupuy & Todd Sorensen, 2014. "On Input Market Frictions and Estimation of Factors' Demand," Southern Economic Journal, John Wiley & Sons, vol. 80(3), pages 772-781, January.
    • Handle: RePEc:wly:soecon:v:80:y:2014:i:3:p:772-781
    DOI: 10.4284/0038-4038-2012.245
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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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