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Adjustment costs and the identification of Cobb Douglas production functions

Stephen Bond () and Mans Soderbom ()
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Stephen Bond: Institute for Fiscal Studies and Nuffield College, Oxford

No W05/04, IFS Working Papers from Institute for Fiscal Studies

Abstract: 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. We consider the role of adjustment costs for inputs in identifying these parameters in this context. 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.

Keywords: Production functions; adjustment costs; identification (search for similar items in EconPapers)
JEL-codes: D20 D24 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff and nep-mic
Date: 2005-02-09
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