Factor Demand Model Research Articles

The Rebound Effect in Energy-Intensive Industries:A Factor Demand Model with Asymmetric Price Response

The purpose of this paper is to estimate industry-specific direct rebound effects and to relate these effects to industry energy efficiency programs. The rebound effect represents economic behavior that will offset energy savings from energy efficiency improvements. The paper focuses on four energy intense sectors in Sweden; pulp and paper, iron and steel, chemical, and mining, during 2001-2012. We apply a factor demand model that allows for asymmetric energy price responses, i.e. that firms respond differently to increasing and decreasing energy prices. The results show considerable rebound effects. For electricity and non-fossil fuels, efficiency improvements could even ‘backfire’. To mitigate this effect, policies, such as voluntary energy efficiency programs, should be combined with an increase in energy taxes if the ambition is to reduce overall energy use.

Farm size and use of inputs: explanations for the inverse productivity relationship

PurposeThe relationship between farm size and land productivity is a hotly debated issue in the study of agricultural economics and development economics. The purpose of this paper is to explore the causes leading to the inverse productivity relationship by examining the relationship between farm size and factor inputs.Design/methodology/approachWith a large panel data set of farm households in China during 2010–2011, this study uses the factor demand models to examine the relationship between farm size and per-mu labor and non-labor inputs while employing a stochastic frontier production function in determining the difference of labor efforts in farming operation across farm sizes. Moreover, the models for value-added margins and profits are used to further determine producer behavior of small-size farms.FindingsResults of this study show that, as compared to larger farms, smaller farms not only utilize more labor and non-labor inputs per mu, but also benefit from a higher labor effort. Moreover, smaller farms concentrate more on grain output and cash costs while focusing less on the family labor input costs in an effort to maximize value-added margins rather than profits. The higher yields on smaller farms are thus a result of the utilization of a relatively higher level of labor and non-labor inputs along with skilled-oriented precision farming technology. The inverse productivity relationship is explained by the behavior of small-size producers with employment constraints, leading to smaller farms generating a higher yield than larger farms.Originality/valueWhile Sen (1966), Feder (1985), Eswaran and Kotwal (1986) and others have theoretically derived the causal relationship between the incomplete factor markets, especially incomplete labor markets, and the inverse productivity, empirical studies to test the causal relationships are limited. In particular, a solid foundation based on an empirical analysis is lacking when it comes to explaining the inverse productivity in China. Results of this study are expected to have significant policy implications in terms of the understanding of small-size producer behavior and the associated mechanism underlying the inverse relationship between farm size and land productivity.

Correction to: Assessing the role of futures position substitutability in a monthly model of factor demand for softwood lumber

In the original article’s Table 2, the test result of the fourth null hypothesis (in the table’s fourth column) should read “Fail to reject the null that $${r} \le 3$$ ”. While the original article’s Table 2 data (trace values) and text analysis of Table 2’s data are correct and consistent, and demonstrate how the trace values provide evidence that is insufficient to reject the fourth hypothesis test that $${r} \le 3$$ , the table’s “test result” section in the fourth column for the fourth hypothesis test incorrectly stated “Reject the null that $${r} \le 3$$ ”.

Assessing the role of futures position substitutability in a monthly model of factor demand for softwood lumber

We combine cointegrated VAR modeling with basic neoclassical production theory in a new way that tests for, and illuminates the empirical nature of, the monthly US housing sector’s factor demand for softwood lumber. Statistical evidence strongly suggests that the US housing sector has a Hicksian Cobb-Douglas lumber factor demand arising from applying Shephard’s lemma to the sector’s cost function and that the US housing sector’s residential homebuilding agents treat lumber and lumber futures positions, not as identical factors, but as separate and time-differentiated, factor substitutes. Evidence suggests that homebuilding agents shift between demands for the two substitutes based on movements in the lumber/lumber futures price ratio. This establishes a theoretical link between a number of futures price-impacting market trends and events of great concern to US regulators and the underlying lumber commodity market through effects on futures price.

Assessing the Rebound Effect in Energy Intensive Industries: A Factor Demand Model Approach with Asymmetric Price Response

The purpose of this paper is to analyze the direct rebound effect potentially prevailing in energy intense industries. The rebound effect represents economic mechanisms that will offset energy savings from energy efficiency improvements. For this purpose, a factor demand model is applied incorporating an asymmetric energy price response. Asymmetric prices imply that firms respond more strongly to energy price increases than to energy price decreases. In the empirical model we use a firm level, unbalanced panel covering the years 2001 to 2012 and four major Swedish energy-intensive industries; pulp and paper, iron and steel, chemical, and mining. The result indicates that the rebound effect is considerable in these industries. To mitigate this effect, the results suggest that policies stimulating an increase in energy efficiency should be combined with a raise in energy taxes.

Adjustment costs and threshold effects in factor demand relationships

ABSTRACTIt has been recently argued that producers may not respond to every input price change in the way that a linear factor demand model would predict. This lumpy response is due to adjustment costs that are inherent in the act of adjusting the mix of inputs applied in the underlying production technologies. This study aims to provide a solid conceptual framework for these nonlinearities in factor demand relationships. Industry-specific implications of convex and non-convex adjustment costs for the linearity of the factor demand relationships as well as price and substitution elasticities are explored. A two-regime threshold system of factor demand equations is estimated for several manufacturing industries in the United States. Empirical results suggest significant threshold effects in the factor demand relationships in most nondurable goods sectors. The size and the nature of thresholds depend upon industry characteristics, including input composition and (non)convexity of underlying adjustment costs. Complete matrices of price and substitution elasticities for each industry are derived using estimates of threshold factor demand systems. Discussion of two contrasting cases in greater detail sheds light on how the effect of price shocks on factor demand relationships varies across industries with different adjustment cost structures.

Estimating welfare effects from supply shocks with dynamic factor demand models

This paper examines how the demand for commodities adjusts to supply shocks, and shows the importance of capturing this adjustment process when calculating welfare effects. A dynamic capital adjustment model for U.S. softwood stumpage markets is developed, and compared to a traditional lagged adjustment model. The results show that timber markets in the U.S. adjusted to the large supply shock of the late 1980's over a 5 to 8year period. Our short-run price elasticity estimates are similar to the existing literature, ranging from −0.002 to −0.253, although our estimates show that the demand is substantially more elastic in the long-run, with long-run elasticity estimates ranging from −0.134 to −0.506. If this adjustment in the demand function is taken into account when calculating welfare effects, the effects of the supply shock in timber markets of the late 1980's on consumer surplus declines by over 50% compared to the estimated effects when using the short-run model, and the total welfare effects decline by 37%.

How ICT investment influences energy demand in South Korea and Japan

This empirical study examines substitute/complementary relationships in the demands for ICT capital, non-ICT capital, energy, materials, and labor in the industrial sectors in Japan and South Korea during 1973–2006 and 1980–2009, respectively. In doing so, a dynamic factor demand model is applied to link intertemporal production decisions by explicitly recognizing that the level of certain factors of production (referred to as quasi-fixed factors: ICT and non-ICT capital) cannot be changed without incurring so-called adjustment costs, defined in terms of forgone output from current production. Special emphasis is on the effects of ICT investment on energy use through the substitute/complementary relationships. This study quantifies how ICT capital investment in South Korea and Japan affects industrial energy demand. We find that ICT and non-ICT capital investment serve as substitutes for the inputs of labor and energy use. The results also demonstrate significant cost differences across industries in both countries.

Explaining Breadth and Depth of Employee Voice across Firms: A Voice Factor Demand Model

This paper develops a model which explains breadth and depth of firms’ demand for employee voice. The theory innovation is to model employee voice as a factor input in production and derive a voice demand curve. Differences in voice productivity determinants across firms act as shift factors and cause cross-section variation in voice demand curves which translates into an empirically observable voice frequency distribution. Insights from institutional economics are incorporated to show that transition from a nonunion to union form of voice may cause a large discontinuity in the demand curve. Other contributions include: sharpened definition and delineation of the employee voice construct, use of the voice frequency distribution as a dependent variable in empirical research, graphical representation of the firm’s benefit-cost choice of voice, distinction between employee voice as communication and influence (muscle) and graphical demonstration of conditions under which one is preferred to the other, clarification of the participation/representation gap concept, and policy insights regarding pros and cons of the regulation of employee voice in American labor law.

Modelling an aggregate agricultural panel with application to US farm input demands

A recent class of factor demand models is discussed and used to analyze U.S. state-level production data. The approach accommodates output risk, heterogeneous technologies, technological change, endogenous variables, aggregation across agents, and more general flexible functional forms than previous models. We find the approach to flexibility found in the consumer literature empirically useful in the analysis of producer behavior as our results suggest that standard flexible models that have been ubiquitous in agricultural and industrial research are strongly rejected here in favor of a more general and flexible specification. Further, there is substantial heterogeneity of conditional own-price elasticities across states.

How ICT Investment and Energy Use Influence the Productivity of Korean Industries

This empirical study examines changes in industrial productivity in Korea between 1980 and 2009, focusing on how investment in information and communication technology (ICT) and energy use, influence productivity levels. A dynamic factor demand model is applied in order to link inter-temporal production decisions by explicitly recognizing that the level of certain factors of production cannot be changed without incurring so-called adjustment costs, defined in terms of forgone output from current production. In particular, we investigate how the ICT–energy relationship affects total factor productivity growth in 30 industrial sectors. Describing industry-specific productivity levels is important for policymakers when the allocation of public investment and support is limited. The results presented herein show that ICT/non-ICT capital investment are substitutes for labor and energy use. We also find a high output growth rate in the sampled sectors, and increasing returns to scale, whose effects on the TFP component are higher than those of technological progress.

On the Interrelation of Capital and Labor Adjustment Costs at the Firm Level

In this paper, we study capital and labor adjustment costs by allowing interrelation among adjustments when estimating a dynamic model of factor demand for Greek manufacturing firms. A balanced panel dataset of 1299 firms on 9093 observations for the period 1998-2004 has pointed to strong evidence of (a) inaction, (b) lumpiness, and (c) interrelation of factor adjustment. On account of these empirical observations, we set up and estimate models with alternative factor adjustment costs, using the Method of Simulated Moments. We show that a model incorporating convex, non convex, and interrelation adjustment processes fits the data best. Moreover, the results indicate that (i) labor and capital adjustment should be analyzed together, (ii) capital and labor’s slow adjustment is generated and can be explained by costs associated with changing input demand, and (iii) the firm has an incentive to adjust input factors at the same time period, since adjustment costs decrease when the firm decides to adjust the two factors, namely capital and labor, simultaneously.

Emigration and Wages: The EU Enlargement Experiment

This paper studies the impact of a large emigration wave on real wages in the source country. Following EU enlargement in 2004, a large share of the workforce of the Central and Eastern Europe emigrated to Western Europe. Using data from Lithuania for the calibration of a factor demand model I show that emigration had a significant short-run impact on real wages in the source country. In particular, emigration led to a change in the wage distribution between young and old workers. The wages of young workers increased by 6%, whereas the wages of old workers decreased by around 1%. On the contrary, I find no effect on the wage distribution between workers of different education levels.

Inventories, Factor Demand and Capacity Utilization: The Long and Short Run Structure

An ECM is derived from first order conditions of a factor demand model. Decisions on inventory stock and capacity utilization are (endogenously) modeled, by which a large system of equations results. Within this system the exogeneity of real factor prices as well as sales is tested. The role of inventor stock in the long run, i.e. as a precautionary measure (according to Holt, Modigliani, Muth and Simon (1960)) or as a production factor (Kydland and Prescott (1982), Christiano (1988)) are further investigated by impulse response functions. For French industrial sectors (1970.I-1992.IV) inventory stocks turn out to be both a decision variable as well as a residual. The precautionary measure is not rejected, but a linear-quadratic specification seems not to hold. Further, no strong evidence is found for the inventory stock as a production factor.

Emigration and Wages: The EU Enlargement Experiment

This paper studies the impact of a large emigration wave on real wages in the source country. Following EU enlargement in 2004, a large share of the workforce of the Central and Eastern Europe emigrated to Western Europe. Using data from Lithuania for the calibration of a factor demand model I show that emigration had a significant short-run impact on real wages in the source country. In particular, emigration led to a change in the wage distribution between young and old workers. The wages of young workers increased by 6%, whereas the wages of old workers decreased by around 1%. On the contrary, I find no effect on the wage distribution between workers of different education levels.

Sequentiality Versus Simultaneity: Interrelated Factor Demand

Abstract Firms may adjust capital and labor sequentially or simultaneously. In this paper, we develop a structural model of interrelated factor demand subject to nonconvex adjustment costs and estimated by simulated method of moments. Based on Norwegian manufacturing industry plant-level data, parameter estimates reveal cost advantages for adjusting capital and making net changes in labor simultaneously. Factor demand models with fully specified interrelated adjustment costs structures perform best to describe the dynamic panel data.

Impact of disaggregated ICT capital on electricity intensity in European manufacturing

In this article we empirically analyse the impact of disaggregated ICT capital on the electricity intensity in five major European manufacturing industries (chemical, food, metal, pulp and paper, textile). The analysis of each industrial sector is based on an unbalanced panel including data for eight EU member countries (Denmark, Finland, Germany, Italy, Portugal, Slovenia, Sweden and the UK) for the period 1991 to 2005. The panel-econometric approach, in which we account for country-specific fixed effects, is based on a factor demand model similar to the one derived in Collard et al. (2005) for the French service sector. On the one hand, our analysis provides some evidence for an electricity-saving effect on production, induced by communication technologies in all sectors considered. On the other hand, the effect of computers and software on the electricity intensity of industrial production is not that clear-cut, but it does seem to be strongly dependent on the sector-specific production processes involved. Overall, the net effect of ICT diffusion on electricity intensity of production appears to be in favour of an enhancement of electricity efficiency in production.

Investments and Energy Efficiency in Colombian Manufacturing Industries

This paper investigates the effects of investments on energy efficiency performance using data from Colombian manufacturing industries. These industries were analysed as a whole and as energy intensive sectors and non-energy intensive sectors between 1998 and 2005. Using a simple factor demand model, we estimate the structural parameters of the model using both time-series and cross-sectional dimensions of the data, and we include the effect that investments have on energy efficiency in Colombian manufacturing industries. The results showed that in Colombian manufacturing industries overall, as well as in non-energy intensive sectors, the main variables that determine energy efficiency performance are energy prices, machinery and equipment investments and foreign investments. Whereas electricity prices show lower significance levels, investments in research and development (R&D) are not statistically significant. In contrast, for energy intensive sectors, only energy prices and foreign investments are statistically significant. Therefore, these results demonstrate the close relationship between energy prices and investments with respect to energy efficiency improvements in Colombian manufacturing industries. These findings have important implications for policy makers aiming to encourage governments to adopt strategies that combine energy prices and technological change, as well as those policy makers wishing to strengthen foreign investment in order to improve technology development, productivity and energy efficiency in manufacturing industries.

The Impact of Disaggregated ICT Capital on Electricity Intensity of Production: Econometric Analysis of Major European Industries

In this paper we empirically analyse the impact of disaggregated ICT capital on the electricity intensity in five major European industries (chemical, food, metal, pulp & paper and textile). The analysis of each industrial sector is based on an unbalanced panel including data for eight EU member countries (Denmark, Finland, Germany, Italy, Portugal, Slovenia, Sweden and the UK) for the period 1991-2005. The panel-econometric approach, in which we account for country-specific fixed effects, is based on a factor demand model that is similar to the one derived in Collard et al. (2005) [Energy Economics 27 (2): 541-550] for the French services sector. On the one hand, the analysis provides evidence for an electricity-saving effect on production induced by communication technologies in all of the sectors considered. On the other hand, the effect of computers and software on the electricity intensity of industrial production is not that clear-cut, but rather seems to be strongly dependent on the sector-specific production processes involved. Overall, the net effect of ICT diffusion on electricity intensity of production appears to be in favour of an enhancement of electricity efficiency in production.

Sequentiality Versus Simultaneity: Interrelated Factor Demand

A structural model is developed and estimated by a maximum likelihood routine to investigate interrelated factor demand subject to nonconvex adjustment costs. The dataset concerns Norwegian plants operating in manufacturing industries and it covers the period 1993-2005. The estimates indicate that it is advantageous to adjust the stock of labour and capital simultaneously. The cost advantage of simultaneous changes is small for capital but is large for labour. The empirical results suggest that when estimating separate factor demand models the bias of parameter estimates is most severe in case of labour demand.