Why are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period

ISER Discussion Paper No. 719

29 Pages Posted: 1 Oct 2008

See all articles by Kazuo Ogawa

Kazuo Ogawa

Osaka University - Institute of Social and Economic Research (ISER)

Date Written: September 2008

Abstract

This paper examines empirically some of the reasons why Japanese manufacturing firms frequently fail to satisfy concavity conditions of the cost function. We focus on the "bubble period" in the 1980s when land was in great demand for reasons related to both production and speculation, and land prices soared. By estimating the translog cost function with land as one of production inputs for manufacturing firms, we find that violation of concavity resulted from borrowing constraints and large adjustments of employment. We also demonstrate that elasticities of substitution between land and other inputs and input demand with respect to land rental prices are both estimated with large biases if the firms violating concavity are not excluded from the analysis.

Keywords: Land, Translog cost function, Concavity

JEL Classification: D24, R14

Suggested Citation

Ogawa, Kazuo, Why are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period (September 2008). ISER Discussion Paper No. 719, Available at SSRN: https://ssrn.com/abstract=1272785 or http://dx.doi.org/10.2139/ssrn.1272785

Kazuo Ogawa (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

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Ibaraki, Osaka 567-0047
Japan
+81 6 6879 8570 (Phone)

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