Adjustment costs, production functions and capital–labour substitution in Greek manufacturing: 1958–80

Abstract

Treating adjustment costs as part of the decision-maker's objective function, a differential system of factor demand equations is derived and estimated jointly with a CES production function using data for Greek manufacturing. Estimates of production function parameters and adjustment cost functions are thus obtained. The results show that; the elasticity of substitution between capital and labour is slightly higher than one; increasing or constant returns to scale exist for most manufacturing branches; there is considerable technical progress of around 4% adjustment cost due to investment and employement changes are responsible for an annual loss of 8.54% of output, whereas labour seems to be used inefficiently in Greek manufacturing.