Factor demands and substitution in the Italian manufacturing sector: a dynamic duality model

Abstract

This paper uses the dynamic duality approach to build a closed-form factor demand equation system which is consistent with the intertemporal problem faced by the representative firm, aiming at minimizing the present value of its expected future costs. The technology is characterized by convex internal costs in adjusting the quasi-fixed capital input with no constraints on the degree of returns to scale. A model imposing long-run constant returns is also estimated. The two models are non-nested because of the functional form used to specify the underlying technology. In both models the hypotheses of existence and separability of adjustment costs are tested. Non-nested tests are used to discriminate between the assumptions of non-constant and constant returns to scale. Finally, the production structure for the Italian total manufacturing sector over the period 1954–1983 is analysed.