A Vintage Capacity Model of Production

Parker, J.A. (1980). A Vintage Capacity Model of Production. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-80-143

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Abstract

In recent years, many econometric studies of production processes have been undertaken at both the industry and aggregate levels. Such studies represent an attempt to use aggregated, observable data on prices and flows of industry inputs and outputs to estimate important characteristics of production technology such as elasticities of substitution between inputs to production. Many studies have been based on an assumption of continuous minimum-cost equilibrium and make no distinction between short- and long-run effects. Such an assumption can lead to a fundamental misspecification of the model and biased estimates of substitution elasticities.

As an alternative to this static equilibrium model, a vintage model is developed here which embodies a polar opposite assumption about production technology -- that once production units have been installed, their technologies are fixed. This assumption corresponds more closely to the nature of production in some sectors of the economy. The structure of the vintage capacity model is such that it can be estimated using data and econometric techniques almost identical to those used for the static equilibrium model. This suggests the feasibility of using both models to generate alternative estimates of important parameters of production technology.

In Section II of this paper, the structure of the static equilibrium model is briefly reviewed and its common features with the vintage capacity model are noted. In Section III, the vintage capacity model is presented, highlighting the differences between the two models. The conclusion discusses possible implementations of the model and ways in which the model could be extended.

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