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On Input Market Frictions and Estimation of Factors Demand

  • Dupuy, Arnaud



  • 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. Winner of 2015 Georgescu-Roegen Prize for best paper published in SEJ during the calendar year.
Handle: RePEc:iza:izadps:dp5881
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  1. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Julie L. Hotchkiss & Myriam Quispe-Agnoli, 2009. "Employer monopsony power in the labor market for undocumented workers," FRB Atlanta Working Paper 2009-14, Federal Reserve Bank of Atlanta.
  3. David Card, 2009. "Immigration and Inequality," CReAM Discussion Paper Series 0907, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
  4. Dupuy, Arnaud & Marey, Philip S., 2007. "Shifts and Twists in the Relative Productivity of Skilled Labor," IZA Discussion Papers 2694, Institute for the Study of Labor (IZA).
  5. 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).
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  11. 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..
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  14. 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.
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