Variable Cost Functions and the Rate of Return to Quasi-Fixed Factors: An Application to R and D in the Bell System

36 Pages Posted: 27 Apr 2000 Last revised: 21 Aug 2010

See all articles by M. Ishaq Nadiri

M. Ishaq Nadiri

New York University (NYU) - Department of Economics; National Bureau of Economic Research (NBER)

Mark A. Schankerman

London School of Economics and Political Science; Centre for Economic Policy Research (CEPR)

Date Written: December 1980

Abstract

We formulate a variable cost function model in which certain inputs are treated as quasi-fixed, and develop a simple statistical test of whether optimization occurs for the quasi-fixed inputs. It is shown how to retrieve characteristics of the long-run cost function from the variable cost parameters, with specific reference to the cost elasticity and the elasticities of substitution. We also present a model of the I returns to R & D in the context of a regulated firm and show how to I estimate the net rate of return to R & D from the variable cost function. A translog version of the model is estimated for the Bell System for the period 1947-1976. The empirical results suggest substantial long-run economies of scale at the aggregate level. The formal envelope test indicates that the Bell System's use of capital and R & D was cost- minimizing during the post-war period, but the conclusion is seriously qualified by evidence that the power of the test in this application is low. Finally, we estimate the net rate of return to R & D in the Bell System in the range of 25-40 percent, which is somewhat higher than available estimates for manufacturing industries.

Suggested Citation

Nadiri, M. Ishaq and Schankerman, Mark A., Variable Cost Functions and the Rate of Return to Quasi-Fixed Factors: An Application to R and D in the Bell System (December 1980). NBER Working Paper No. w0597. Available at SSRN: https://ssrn.com/abstract=227527

M. Ishaq Nadiri (Contact Author)

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
212-998-8968 (Phone)
212-995-4013 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark A. Schankerman

London School of Economics and Political Science ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7518 (Phone)
+44 20 7831 1840 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
21
Abstract Views
1,380
PlumX Metrics