Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 479: A Dynamic Factor Demand Model for the Swedish Pulp Industry, 1998

Tommy Lundgren () and Magnus Sjöström ()
Additional contact information
Tommy Lundgren: Department of Forest Economics, Postal: S 901 83 Umeå, Sweden
Magnus Sjöström: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: In this paper we specify and estimate a dynamic factor demand model for the Swedish pulp industry. Firms are assumed to have rational expectations and costs of adjustment will arise when the capital stock is altered. The estimates are based on plant level panel data for the period 1972-1990. We find weak evidence of the presence of adjustment costs. All the estimated own price elasticities are negative and the empirical cost function have all the desired properties from theory. The result suggest that user cost of capital is a significant determinant of pulp industry investment, while output level is not. We also find that pulp industry investment is insensitive to variations in the price of electricity.

Keywords: factor demand; dynamic optimization; panel data; bootstrap

JEL-codes: C33; C61; D21

20 pages, October 18, 1998

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