Abstract
T HIS is a study of interrelated demand for capital and labor. In a purely static model capital and labor demand functions will usually contain common production function parameters and prices and thus may be viewed as a system of interrelated equations. There are two additional reasons why the interrelated characteristic may be important in a dynamic disequilibrium model. First, if one input is less than a desired or long-run equilibrium value, demand for other inputs may be dependent on the shortage of the first input. Second, the actual process of adjustment may influence demand for other inputs via costs of adjustment. In this article we develop and estimate parameters of labor and capital demand functions where both the deviation of capital from a target value (KK*) and costs of adjustment influence labor demand. Nadiri and Rosen (1969) is a well-known study of interrelated factor demand arising for the first reason noted above. They develop a multivariate flexible accelerator relationship
Published Version
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