Factor Demand Elasticities Research Articles

Taxes and subsidies in a multisectoral econometric model

This paper examines medium-term adjustments to tax-subsidy shifts by means of simulations with a Jorgenson-type econometric model for the Federal Republic of Germany. Under a balanced budget assumption, the results show that relative prices move in the expected direction, whereas aggregate price effects are negligible. The impacts of compensated subsidy cuts on income, sectoral production and employment scarcely depend on the intensities and price elasticities of factor demand in the affected industries. Simulation results for the most favoured sectors in Germany suggest that demand shifts induced by subsidy cuts may cause losses of total employment or a decrease in aggregate production. As the perfect competition framework of the simulation tool does not refer to possible gains in competitiveness, the sketched macroeconomic developments may be accompanied by positive effects of compensated subsidy cuts which are not treated here.

Costs and Factor Substitution in the Provision of Local Fire Services

Evidence on costs and factor substitution is presented for a sample of local fire departments in New York State. The results suggest that fire service production does not fit either Leontief, Cobb-Douglas, or CES technology. In addition, exogenous socioeconomic variables are found to significantly affect public-sector costs and the estimates of factor price elasticities. The findings of relatively low factor demand and substitution elasticities suggest that local governments may have limited flexibility in adjusting their production of fire services to minimize the impact of rising factor prices. Copyright 1992 by MIT Press.

Short-Run Output Response in the Western Canadian Cattle Industry

This paper present the results of recent empirical work on the short-run producetion flexibility of cow-calf producers in Western Canada. Several aspects of firm behaviour may be inferred from the econometric estimates, including short-run elasticities of supply and factor demand, and the total elasticity of cattle supply. The principal empirical findings are that many of the shourt-run supply and factor demand responses of firms, are elastic with respect to within-season price variability. The evidence does not support a vertical or negatively-sloped short-run supply curve for cattle, where one previously has been hypothesized in the theoretical literature.

PLANNING HORIZONS AND THE MONOPOLIST: A NOTE ON A GENERALIZED SAMUELSON‐LE CHATELIER PRINCIPLE

Time is an important determinant of factor demand and supply elasticities in producer theory. The typical textbook distinction between the short‐run and the long‐run focuses upon the ability of the decision‐maker to adjust fixed factors. Indeed, the length of the firm's planning horizon may be identified with the degrees of freedom available to the firm; i.e. the number of factors that can optimally be adjusted to a changing economic environment. The purpose of this note is to illustrate use of the envelope theorem to recover a generalized Samuelson‐Le Chatelier principle in a simple and elegant manner. In particular, we will show how a monopolist's derived factor demand elasticities may be ordered by the length of the planning horizon. Thus the economically appealing and intuitive notion that the monopolist's factor demand decisions will be more responsive to price changes, the greater the flexibility in utilizing fixed factors will be given an analytically rigorous, though quite simple, demonstration utilizing duality theory and the well‐known envelope theorem.

Factor Demand and Substitution in a Developing Country: Energy Use in Mexican Manufacturing

A translog cost function is used to estimate elasticities of substitution and factor demand in a number of Mexican industries (1966-81). The results vary, but factor demand is on average quite price sensitive and elasticities are of the same order of magnitude as in other studies for both developed and developing countries. This indicates that factor demand does adapt to price changes, even in countries which are dependent on buying technology abroad. It also shows that a policy of heavy subsidies to domestic energy consumption is the main reason for growing energy intensity, thereby casting some light on the allocation costs of such subsidies.

Residential energy conservation choices of poor households during a period of rising fuel prices

This study models the production and consumption of residential space heat, a non-market good. Production reflects capital investment decisions of households; consumption reflects final demand decisions given the existing capital stock. In the model, the production relationship is represented by a translog cost equation and an energy factor share equation. Consumption is represented by a log-linear demand equation. This system of three equations - cost, fuel share and final demand - is estimated simultaneously. Results are presented for two cross-sections of households, surveyed in 1973 and 1981. Estimates of own-price and cross-price elasticities of factor demand are of the correct sign, and less than one in magnitude. The price elasticity of final demand is about − 0.4; the income elasticity of final demand is less than 0.1. Short-run and long-run elasticities of demand for energy are about − 0.3 and − 0.6, respectively. These results suggest that price-induced decreases in the use of energy for space heat are attributable equally to changes in final demand and to energy conservation, the substitution of capital for energy in the production of space heat. The estimated model is used to simulate the behavior of poor and non-poor households during a period of rising energy prices. This simulation illustrates the greater impact of rising prices on poor households

Factor Demand and Substitution under Decreasing Returns to Scale. An Application to the Rybczynski Theorem

In the first part of this paper, the elasticity of substitution and factor demand are determined under decreasing returns to scale. By applying the properties of homogeneous functions, elasticities of marginal products with respect to factor uses are shown to be useful when determining the elasticity of factor substitution and factor demand elasticities. Second, the results are applied to the theorem developed by Rybczynski (1955), according to which an increase in the endowment of one factor, while the endowment of the other factor and commodity prices remain unchanged, will increase production of the good intensive in this factor, and will reduce production of the good intensive in the other factor. This theorem has been developed within the context of a two-good, two-factor model under constant returns to scale. In the more general case, under variable returns to scale, the conditions for the Rybczynski theorem have been derived by Jones (1968), Panagariya (1980) and Herberg, Kemp and Tawada (1982). The case of variable returns to scale includes both decreasing and increasing returns to scale. In this paper, however, we assume the simple model under decreasing returns to scale formulated by Hansson and Lundahl (1983). We interpret the necessary and sufficient conditions for the Rybczynski theorem using the elasticities of substitution and the factor demand elasticities and derive the condition under which expansion can occur in both sectors.

The Stolper-Samuelson theorem under decreasing returns to scale

The necessary and sufficient condition for the Stolper-Samuelson theorem is derived under decreasing returns to scale. This result is interpreted by separating a factor-intensity effect and a scale effect and by using the elasticities of substitution and the factor demand elasticities.

Union Work Rules and Efficiency in the Building Trades

This paper estimates the effect of union work rules in the building trades on employment and costs by comparing factor demand elasticities for union and nonunion contractors and subcontractors over micro data from two different types of construction. The results show that the elasticities of substitution between labor and nonlabor inputs and own-price elasticities for nonlabor inputs are about the same for union and nonunion contractors. In contrast, the elasticities of substitution among different skill categories of labor and the own-price elasticities for each category are much lower under unionism. A simulation based on a typical office building subcontract shows that these lower factor demand elasticities result in excess staffing of 3.2 percent, excess labor costs of 5.0 percent, and excess total costs of 2.0 percent. This study also examines directly the effect of union work rules on the use of prefabricated components and finds that union contractors are justas likely to use them as nonunion contractors.

The Factor Share Approach to Production Function “Estimation”: Actual or Estimated Equilibrium Shares?

For years agricultural economists have been concerned with obtaining reliable estimates of production function parameters. Among other reasons, such estimates are needed to address policy issues involving resource misallocation, supply response, and factor demand in agriculture. The appeal of production function approaches to such problems, as contrasted with direct estimation of product supply and factor demand relationships, is with richness of model for addressing cross-price effects and matters of resource allocation. However, as is well known, problems of multicollinearity and technological change have thwarted most efforts to obtain reliable estimates of aggregate production elasticities by direct estimation (Doll; Rosine and Helmberger). In an effort to circumvent multicollinearity barrier posed by direct estimation, Tyner and Tweeten (1965) indirectly estimated aggregate production elasticities for U.S. agriculture using a factor share approach. Noting that in equilibrium, factor shares equal factor elasticities for an industry comprised of profitmaximizing firms, Tyner and Tweeten synthesized a Cobb-Douglas production function by estimating equilibrium factor shares based on historical data and Nerlove partial adjustment model. Equilibrium factor shares were estimated individually for each of nine input categories assuming that actual adjustment between any two years was a constant proportion of extent of own-factor disequilibrium. Estimates were developed for several decades by including dummy variables in model. In a subsequent article Tyner and Tweeten (1966) developed estimates of resource misallocation, product supply elasticity, and factor demand elasticities based on their indirectly estimated CobbDouglas production functions. In 1974 Rosine and Helmberger published an article with a similar intent. They also explored several macro policy issues based on a synthesized Cobb-Douglas production function for U.S. agriculture. They used a simpler model than Tyner and Tweeten, by assuming that production elasticities were given by actual factor shares. In effect, Rosine and Helmberger assumed instantaneous adjustment to equilibrium thereby avoiding numerous estimation difficulties. (See writings of D. Gale Johnson in 1948 and Ruttan and Stout in 1960 for examples of earlier expressions of interest in factor shares.) To develop normative estimates of production elasticities following a factor share approach, it seems clear, a priori, that Tyner-Tweeten approach should be preferable conceptually to that of Rosine and Helmberger. In words of Tyner and Tweeten, the use of [actual] factor shares as production elasticities trades intercorrelation problem for dubious assumption that economic equilibrium prevails (1965, p. 1462). The purpose of this paper is to evaluate practical effects of assumption of continual economic equilibrium (instantaneous adjustment) on production elasticity estimation.

A Cost Function Approach to the Measurement of Elasticities of Factor Demand and Elasticities of Substitution

American Journal of Agricultural EconomicsVolume 56, Issue 2 p. 377-386 Proceedings Papers Winter Meeting of the American Agricultural Economics Association with Allied Social Science Associations New York, December 27–30, 1973Free to Read A Cost Function Approach to the Measurement of Elasticities of Factor Demand and Elasticities of Substitution Hans P. Binswanger, Hans P. Binswanger associate of the Agricultural Development Council, Inc. and assistant professor of agricultural and applied economics New York; University of MinnesotaSearch for more papers by this author Hans P. Binswanger, Hans P. Binswanger associate of the Agricultural Development Council, Inc. and assistant professor of agricultural and applied economics New York; University of MinnesotaSearch for more papers by this author First published: 01 May 1974 https://doi.org/10.2307/1238771Citations: 218AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume56, Issue2May 1974Pages 377-386 This article also appears in:The Economics of Agricultural Production RelatedInformation