Adjustment Costs and the Identication of Cobb Douglas Production Functions

Cobb Douglas production function parameters are not identi…ed from crosssection variation when inputs are perfectly ‡exible and chosen optimally, and input prices are common to all …rms. We consider the role of adjustment costs for inputs in identifying these parameters in this context. The presence of adjustment costs for all inputs allows production function parameters to be identi…ed, even in the absence of variation in input prices. This source of identi…cation appears to be quite fragile when adjustment costs are deterministic, but more useful in the case of stochastic adjustment costs. We illustrate these issues using simulated production data. JEL Classi…cation: D20, D24, C23. Key words: Production functions, adjustment costs, identi…cation. Acknowledgement: This paper is dedicated to the memory of Tor Jakob Klette, a …ne scholar and an inspiration to those who knew him. We thank Victor Aguirregabiria, Bronwyn Hall, participants in a conference at the University of Oslo and a seminar at the University of Göteborg for helpful comments. Financial support from the ESRC Centre for Public Policy at the Institute for Fiscal Studies is gratefully acknowledged. The CSAE is funded by the ESRC.