Material And Value-Adding Inputs In Manufacturing Enterprises

Abstract

Because of the nature of assembly-line operations, one would expect technologies in manufacturing firms to differ in systematic ways from those in many other types of firms. Identifying such differences can therefore be useful in the formulation and testing of restrictions to flexible functional forms. In the present paper, I characterize a multiproduct manufacturing firm and use the characterization to formulate testable hypotheses about the firm's technology, cost function, and profit function. I argue that manufacturing enterprises exhibit a form of almost nonjointness in input quantities and prices in which the individual sub-technologies have quasi-fixed proportions. Substitution across product lines is responsible for the substitutability between material and value-adding inputs that we often observe in aggregate data. Neglecting the special structure of manufacturing technology can seriously bias estimates of aggregate productivity growth rates.