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A Firm’s Model of Production: The Elasticity of Technical Substitution of Labor and the Interaction Between R&D and Advertising

Author

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  • Guilló, María Dolores

    (Department of Economics, Universidad de Alicante, Spain)

Abstract

This article develops a model of the firm with endogenous labor-augmenting productivity and product perceived-quality. In this setup knowledge capital and advertising expenditures determine jointly the perceived quality of the firm’s product, which in turn influences the firm’s investment in R&D. It shows that R&D and advertising investments are substitutes and that the degree of substitution is positively related to the elasticity of technical substitution of labor. Moreover, higher relative wages induce more R&D (less advertising) and higher labor productivity if this elasticity is below one. This result is reversed if the elasticity of substitution is above one, but relative wages have no effect on intangible investments in the case of a unitary elasticity.

Suggested Citation

  • Guilló, María Dolores, 2024. "A Firm’s Model of Production: The Elasticity of Technical Substitution of Labor and the Interaction Between R&D and Advertising," QM&ET Working Papers 24-2, University of Alicante, D. Quantitative Methods and Economic Theory.
    • Handle: RePEc:ris:qmetal:2024_002
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    More about this item

    Keywords

    Advertising; R&D; intangible capital; productivity; production function; firm behavior;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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