Testing for production with complementarities

Sep 2014 | 722

Authors: Pawel Dziewulski,John Quah

Suppose we observe a finite number of input decisions made by a firm, as well as the prices at which those inputs were acquired.  What conditions on the set of observations are necessary and sufficient for it to be consistent with a firm choosing inputs to maximize profit, subject to a production function exhibiting production complementarities?  In this paper, we develop an axiomatic characterisation of this hypothesis and also develop a test that can be easily applied to finite data sets.

JEL Codes: D21, D24

Keywords: profit maximisation, production complementarities, supermodular production, modern manufacturing, cyclical monotonicity, quasilinear preferences

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