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On Input Market Frictions and Estimation of Factors Demand

  • Dupuy, Arnaud

    ()

    (LISER (CEPS/INSTEAD))

  • Sorensen, Todd A.

    ()

    (University of Nevada, Reno)

In this paper 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 non trivial 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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5881.

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Length: 14 pages
Date of creation: Jul 2011
Date of revision:
Publication status: published in: Southern Economic Journal, 2014, 80 (3), 772-782
Handle: RePEc:iza:izadps:dp5881
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  1. George J. Borjas, 2003. "The Labor Demand Curve is Downward Sloping: Reexamining the Impact of Immigration on the Labor Market," NBER Working Papers 9755, National Bureau of Economic Research, Inc.
  2. Torberg Falch, 2010. "The Elasticity of Labor Supply at the Establishment Level," Journal of Labor Economics, University of Chicago Press, vol. 28(2), pages 237-266, 04.
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  5. Dupuy Arnaud & Marey Philip, 2005. "Shifts and Twists in the Relative Productivity of Skilled Labor," ROA Research Memorandum 007, Maastricht University, Research Centre for Education and the Labour Market (ROA).
  6. Ransom, Michael R. & Oaxaca, Ronald L., 2005. "Sex Differences in Pay in a "New Monopsony" Model of the Labor Market," IZA Discussion Papers 1870, Institute for the Study of Labor (IZA).
  7. David Card & Christian Dustmann & Ian Preston, 2009. "Immigration, Wages, and Compositional Amenities," NBER Working Papers 15521, National Bureau of Economic Research, Inc.
  8. Simona Lup TICK & Ronald L. OAXACA, 2010. "Technological Change and Gender Wage Gaps in the U.S. Service Industry," Annales d'Economie et de Statistique, ENSAE, issue 99-100, pages 47-65.
  9. Boris Hirsch & Thorsten Schank & Claus Schnabel, 2008. "Differences in Labor Supply to Monopsonistic Firms and the Gender Pay Gap: An Empirical Analysis Using Linked Employer-Employee Data from Germany," Working Papers 1111, Princeton University, Department of Economics, Industrial Relations Section..
  10. Julie L. Hotchkiss & Myriam Quispe-Agnoli, 2009. "Employer monopsony power in the labor market for undocumented workers," Working Paper 2009-14, Federal Reserve Bank of Atlanta.
  11. Katz, L.F. & Murphy, K.M., 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Harvard Institute of Economic Research Working Papers 1580, Harvard - Institute of Economic Research.
  12. David Card & Thomas Lemieux, 2001. "Can Falling Supply Explain The Rising Return To College For Younger Men? A Cohort-Based Analysis," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 705-746, May.
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