TECHNICAL CHANGE, INPUT-SUBSTITUTION AND THE SPECIFICATION OF DYNAMIC FACTOR DEMANDS

Based on duality relationships for infinite horizon control problems, this paper develops and discusses a theoretical framework that allows technical change to be incorporated consistently into a system of dynamic factor demands. Two estimable models are derived based on the alternative assumptions of static technology expectations and expected continuous technical change. The empirical implications of the models are demonstrated by specifying a parametric model and then deriving the implied investment, variable factor, and supply system, and the associated profit maximizing and cost minimizing price elasticities. When the structure of the production technology is not directly known or observable, the dynamic duality approach provides an indirect method for analysing investment behaviour and the characteristics of the technology.