COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 735

"The Dynamic Demand for Capital and Labor"

Matthew D. Shapiro

November 1984
Revised January 1985

A model of the dynamically interrelated demand for capital and labor is specified and estimated. The estimates are of the first-order conditions of the firm’s problem rather than of the closed-form decision rules. This use of the first-order conditions allows a random rate of return and a flexible specification of the technology. The estimates do not imply the very slow rates of adjustment displayed in other, related estimates of the demand for capital. Because adjustment is estimated to be rapid, there is, contrary to the standard view, scope for factor-prices to affect investment at relatively high frequencies.

JEL Classification: 131, 641

Keywords: Investment, capital, labor demand

See CFP 650