Variable Cost Functions and the Rate of Return to Quasi-Fixed Factors: An Application to R and D in the Bell System / M. Ishaq Nadiri, Mark Schankerman.

Format:

Book

Author/Creator:

Nadiri, M. Ishaq.

Contributor:

National Bureau of Economic Research.

Schankerman, Mark.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0597.

NBER working paper series no. w0597

Language:

English

Subjects (All):

Rate of return.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Variable Cost Functions and the Rate of Return to Quasi-Fixed Factors

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1980.

Cambridge, Mass. : National Bureau of Economic Research, 1980.

Summary:

We formulate a variable cost function model in which certain inputs are treated as quasi-fixed, and develop a simple statistical test of whether optimization occurs for the quasi-fixed inputs. It is shown how to retrieve characteristics of the long-run cost function from the variable cost parameters, with specific reference to the cost elasticity and the elasticities of substitution. We also present a model of the I returns to R & D in the context of a regulated firm and show how to I estimate the net rate of return to R & D from the variable cost function. A translog version of the model is estimated for the Bell System for the period 1947-1976. The empirical results suggest substantial long-run economies of scale at the aggregate level. The formal envelope test indicates that the Bell System's use of capital and R & D was cost- minimizing during the post-war period, but the conclusion is seriously qualified by evidence that the power of the test in this application is low. Finally, we estimate the net rate of return to R & D in the Bell System in the range of 25-40 percent, which is somewhat higher than available estimates for manufacturing industries.

Notes:

Print version record

December 1980.