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Input cost, capacity utilization and substitution in the short run

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  • Jaumandreu, Jordi
  • Martín Marcos, Ana

Abstract

This article studies the behavior of input cost shares in an environment where labor is costly to adjust, materials can be adjusted at no cost and capital is fixed. A model relating cost shares with relative prices and adjustment costs is proposed, allowing joint estimation of the elasticity of substitution and the adjustment cost function, which is an unknown function of the utilization capacity. Based on a panel of more than 700 manufacturing firms, we find evidence of strong input share variations according to the degree of capacity utilization. The estimated shapes of adjustment costs curves of labor are in agreement with our theoretical model, and we obtain sensible elasticities of substitution estimates. Based on such estimates, we find evidence of a negative (positive) bias in downturns (recoveries) in conventional productivity growth measures.

Suggested Citation

  • Jaumandreu, Jordi & Martín Marcos, Ana, 1998. "Input cost, capacity utilization and substitution in the short run," DES - Working Papers. Statistics and Econometrics. WS 4676, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:4676
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    References listed on IDEAS

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    1. Morrison, Catherine J., 1986. "Productivity measurement with non-static expectations and varying capacity utilization : An integrated approach," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 51-74.
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    4. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
    5. Berndt, Ernst R. & Fuss, Melvyn A., 1986. "Editors' introduction," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 1-5.
    6. Slade, Margaret E., 1986. "Total-factor-productivity measurement when equilibrium is temporary : A Monte Carlo assessment," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 75-95.
    7. Miguel A. Delgado & Juan Mora, 1995. "On asymptotic inferences in non-parametric and semiparametric models with discrete and mixed regressors," Investigaciones Economicas, Fundación SEPI, vol. 19(3), pages 435-467, September.
    8. Daniel S. Hamermesh, 1993. "Labor Demand and the Source of Adjustment Costs," NBER Working Papers 4394, National Bureau of Economic Research, Inc.
    9. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275, January.
    10. Berndt, Ernst R & Morrison, Catherine J, 1981. "Capacity Utilization Measures: Underlying Economic Theory and an Alternative Approach," American Economic Review, American Economic Association, vol. 71(2), pages 48-52, May.
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    Cited by:

    1. Garcia, Angel & Jaumandreu, Jordi & Rodriguez, Cesar, 2004. "Innovation and jobs: evidence from manufacturing firms," MPRA Paper 1204, University Library of Munich, Germany.
    2. Pilar Beneito, 2001. "R&D productivity and spillovers at the firms level: evidence from Spanish panel data," Investigaciones Economicas, Fundación SEPI, vol. 25(2), pages 289-313, May.
    3. Huergo, Elena & Jaumandreu, Jordi, 2004. "Firms' age, process innovation and productivity growth," International Journal of Industrial Organization, Elsevier, vol. 22(4), pages 541-559, April.

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    More about this item

    Keywords

    Capacity utilization;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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