Adjustment Costs and Dynamic Factor Demand Models: A Presentation of Two Approaches Applied to the U.S. Cigarette Manufacturing

Abstract

This paper makes use of the adjustment cost hypothesis to develop and compare the results of two dynamic input demand models applied to the U.S. cigarette manufcturing. One of the models presented in this paper is the flexible accelerator model and the other is the rational expectation model. The results obtained from the estimation of both models support the hypothesis that tobacco stock is a quasi-fixed input but the hypothesis that capital stock is a quasi -fixed input is not supported. The results of the rational expectations model support the hypothesis that capital and tobacco stocks together are subjected to adjustment costs. Note that this hypothesis cannot be tested by the flexible accelerator model.