The Review of Economics and Statistics Vol. 58 No. 2 1976
Problems of Identification and Estimation of the Demand for Capital
Abstract
IN a short comment on Jorgenson's survey article on investment (1971), R. Eisner states that . . abandoning implicit as well as explicit assumptions of perfect competition, desired capital stock should depend upon production functions and supply and demand functions for inputs and outputs, as seen by business decision-makers.1 The main purpose of this paper is to confirm Eisner's argument by demonstrating that a model of the demand for capital services estimated from an empirical relation between quantities and prices need not necessarily be based on neoclassical competitive theory but can be derived from any other non-competitive or imperfectly competitive theory.2 A second aim is to estimate the elasticity of substitution and returns to scale which characterize the Canadian manufacturing industry. In the first section a general long-run model of the use of capital services is specified. Conditions for a competitive equilibrium are then reviewed. The second section argues that the competitive-equilibrium paradigm should be rejected because of a serious problem of identification of the parameters of the model. In the third section two types of derived demand for capital services Cobb-Douglas (CD) and constant elasticity of substitution (CES) are developed and then applied to quarterly data for the total Canadian manufacturing industry (1947-1964). A summary of the main conclusions appears in the final section.
- DOI
- 10.2307/1924023
- Volume
- 58
- Issue
- 2
- Pages
- 173
- Sources
- openalex crossref