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Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period *
Author(s) -
Ogawa Kazuo
Publication year - 2011
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2010.00623.x
Subject(s) - economics , function (biology) , econometrics , production (economics) , bubble , microeconomics , economic bubble , substitution (logic) , monetary economics , computer science , evolutionary biology , parallel computing , biology , programming language
This paper examines empirically the reasons why Japanese manufacturing firms frequently fail to satisfy concavity of the cost function in input prices. We focus on the ‘bubble period’ in the 1980s when land was in great demand and land prices soared. By estimating the translog cost function with land as one of production inputs, we find that violation of concavity mainly resulted from weak bank–firm relationship and massive transactions of land. We also demonstrate that elasticities of substitution between land and other inputs are estimated quite differently if the firms violating concavity are not excluded from the analysis.