An Industry-Equilibrium Analysis of the LeChatelier Principle
By considering firms operating in a perfectly- or monopolisticallycompetitive industry with free entry, we show that well-established results on the celebrated LeChatelier principle (LCP) do not extend into an endogenous competitive environment. For instance, labour demand may be more elastic in the short run (where capital is fixed) than in the long run even if capital and labour are either complements or substitutes in profits. This may also be true locally at a point of long-run equilibrium. A novel insight is that industry-equilibrium effects introduce an asymmetry such that the LCP may hold for wage increases but not for wage decreases. These results are important for the interpretation of estimated labour-demand elasticities. Finally, we show that the LCP may hold for the total industry labour demand in situations where it does not hold for the labour demand of individual firms.
|Date of creation:||04 Sep 2013|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.econ.au.dk/afn/|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John K.-H Quah, 2007. "The Comparative Statics of Constrained Optimization Problems," Econometrica, Econometric Society, vol. 75(2), pages 401-431, 03.
- Koebel, Bertrand M. & Laisney, François, 2010. "The aggregate Le Chatelier Samuelson principle with Cournot competition," ZEW Discussion Papers 10-009, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Milgrom, Paul & Roberts, John, 1996.
"The LeChatelier Principle,"
American Economic Review,
American Economic Association, vol. 86(1), pages 173-79, March.
- de Meza, David, 1981. ""Perverse" Long-run and Short-run Factor Demand Curves," Economica, London School of Economics and Political Science, vol. 48(191), pages 299-303, August.
- Roberts, Kevin, 1999. "Rationality and the LeChatelier Principle," Journal of Economic Theory, Elsevier, vol. 87(2), pages 416-428, August.
When requesting a correction, please mention this item's handle: RePEc:aah:aarhec:2013-16. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.