Adjustment costs and the identification of Cobb Douglas production functions

Adjustment costs and the identification of Cobb Douglas production functions
Document type
Working Paper
Author(s)
Bond, Stephen; Söderbom, Måns
Publisher
Institute for Fiscal Studies
Date of publication
1 December 2003
Series
The Institute for Fiscal Studies Working Papers
Subject(s)
Trends: economic, social and technology trends affecting business
Collection
Business and management
Material type
Reports

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This paper considers the role of adjustment costs for inputs in identifying Cobb Douglas production function parameters. Cobb Douglas production function parameters are not identified from cross-section variation when inputs are perfectly flexible and chosen optimally, and input prices are common to all firms. The presence of adjustment costs for all inputs allows production function parameters to be identified, even in the absence of variation in input prices. This source of identification appears to be quite fragile when adjustment costs are deterministic, but more useful in the case of stochastic adjustment costs. We illustrate these issues using simulated production data.

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