Abstract
In order to explain cyclical behavior of factor demand, the static neoclassical model of the firm has been extended to include either adjustment costs (e.g. Lucas (1967)) or time-to-build considerations as in Kydland and Prescott (1982). This paper presents an intertemporal factor demand model which accounts for adjustment costs and gestation lags. The closed form solution of the model is a highly restricted vector ARMA-process that is estimated using quarterly data for the manufacturing industry in the U.S., 1960–1988.
The main conclusion is that both sources of dynamics of factor demand are identifiable and found to be empirically of importance.
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This research was sponsored by the Economics Research Foundation, which is part of the Netherlands, Organization for Scientific Research (NWO) and by the Royal Netherlands Academy of Arts and Sciences (K.N.A.W.).
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Palm, F.C., Peeters, H.M.M. & Pfann, G.A. Adjustment costs and time-to-build in factor demand in the U.S. manufacturing industry. Empirical Economics 18, 639–671 (1993). https://doi.org/10.1007/BF01205415
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DOI: https://doi.org/10.1007/BF01205415