Sequentiality Versus Simultaneity: Interrelated Factor Demand

Abstract

Any opinions expressed here are those of the author(s) and not those of IZA. Research published in this series may include views on policy, but the institute itself takes no institutional policy positions.The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public.IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion.

Expansionary Investment Activities: Assessing Equipment and Buildings in Productivity

“…Studies on interrelated factor demand have revealed that models of more flexible input factors need to be complemented with less flexible ones. In particular, Bloom (2009) and Asphjell et al (2014) observed that performance of labour demand models improves by also incorporating the dynamics of investment in equipment. However, models concerning the stock of equipment do not have to include labour demand to be able to match important moments of the data.…”

“…Firms tend to first adjust factors of production that are relatively flexible. Labour is flexible compared to fixed capital assets (Asphjell et al 2014). Firms adjust inflexible inputs like structures once uncertainty has been resolved to a large extent (Dixit 1998;Eberly and van Mieghem 1997).…”

“…Few recent studies have analysed firm decisions along more than one dimension when it comes to input demand. Those that have done so usually have focused on two types: investment in equipment and labour (Bloom 2009;Asphjell et al 2014) and investment in equipment and structures (Bontempi et al 2004;Del Boca et al 2008). An exception is Ghosal and Nair-Reichert (2009) who distinguish between four categories: investment in mechanical devices, chemical devices, monitoring devices, and information technology.…”

“…We have learned that microeconomic models of firm behaviour need to incorporate fixed adjustment costs, investment irreversibility, and/or indivisibilities to be able to replicate the behaviour observed in firm investment data (Cooper and Haltiwanger 2006;Bloom 2009;Asphjell et al 2014). In this way, these studies inform the extensive margin in microeconomic investment.…”