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On Input Market Frictions and Estimation of Factors' Demand
Author(s) -
Dupuy Arnaud,
Sorensen Todd
Publication year - 2014
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2012.245
Subject(s) - monte carlo method , economics , econometrics , profit (economics) , production (economics) , estimation , function (biology) , microeconomics , order (exchange) , production function , elasticity (physics) , supply and demand , mathematics , statistics , finance , materials science , management , evolutionary biology , composite material , biology
In this article, we explore the impact of imperfectly competitive input markets on production function estimation. First‐order profit‐maximizing conditions are altered when frictions in input markets cause the elasticity of input supply to the firm to be finite. A consequence of this is that the standard econometric model used for production function estimation will be misspecified. We prove that, in all nontrivial cases, finite elasticities of supply to the firm will lead to inconsistent estimates of production function parameters. Monte Carlo simulations show that the resulting bias can be economically significant.