PARAMETRIC TESTS FOR STATIC AND DYNAMIC EQUILIBRIUM

Econometric estimates of the characteristics of production are highly sensitive to the choice of dynamic specification. In this paper we pro pose a new approach for testing whether inputs are in static equilibri um. The procedure, which is based on the use of a generalized cost fun ction, tests for divergences between the actual and static equilibrium quantities of all inputs simultaneously and symmetrically. We apply i t to two widely used data sets, one at a high level of aggregation and the other at the firm level, and strongly reject static equilibrium i n both cases. (C) 1998 Elsevier Science S.A. All rights reserved.