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Do producers respond to every input price change? A note on nonlinearities in factor demand systems

Gulcan Onel

Applied Economics Letters, 2015, vol. 22, issue 12, 972-977

Abstract: Factor demand relationships, as they are represented by parameters of the cost function, are generally assumed to be linear (in the parameters) in the existing empirical literature. In this note, we argue that this might not always be true, because firms may incur adjustment costs that are inherent in the act of adjusting the mix of inputs applied in the underlying production technologies. We estimate a two-regime threshold system of factor demand equations for several manufacturing industries in the United States. Our results suggest significant nonlinear effects in the factor demand relationships in most nondurable goods sectors. Failure to account for this threshold sensitivity to input price change may cause the estimates of price elasticities to be biased.

Date: 2015
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DOI: 10.1080/13504851.2014.993126

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