Working Paper: NBER ID: w1015
Authors: Robert S. Pindyck; Julio J. Rotemberg
Abstract: This paper presents a dynamic model of the industrial demands for structures, equipment, and blue- and white-collar labor. Our approach is consistent with producers holding rational expectations and optimizing dynamically in the presence of adjustment costs, yet it permits generality of functional form regarding the technology. We represent the technology by atranslog input requirement function that specifies the amount of blue-collar labor (a flexible factor) the firm must hire to produce a level of output given its quantities of three quasi-fixed factors that are subject to adjustment costs: non-production (white-collar) workers, equipment, and structures.A complete description of the production structure is obtained by simultaneously estimating the input requirement function and three stochastic Euler equations.We apply an instrumental variable technique to estimate these equations using aggregate data for U.S. manufacturing. We find that as a fraction of total expenditures, adjustment costs are small in total hut large on the margin,and that they differ considerably across quasi-fixed factors. We also present short- and long-run elasticities of factor demands.
Keywords: Dynamic factor demands; Rational expectations; Adjustment costs; Translog input requirement function
JEL Codes: D24; E22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax changes (H26) | investment (G31) |
| tax changes (H26) | employment (J68) |
| adjustment costs (J30) | investment (G31) |
| adjustment costs (J30) | employment (J68) |
| factor prices (F16) | factor demand (J23) |
| output (C67) | factor demand (J23) |
| adjustment costs (J30) | factor demand (J23) |