ESTIMATION RESULTS
7.6 Short-Run Response Probabilities and Elasticities Response Probabilities
We measure response probabilities by how many percentage points the probability of a positive investment is predicted to change, if an explanatory variable is changed, ceteris paribus, by one percentage point. In other words, we have rescaled capital stocks and labor services so that a one unit change corresponds to a one percentage unit change in the original untransformed variables around their mean values. Because output and price indices are in a logarithmic form, a one unit change in them corresponds to a one percentage point change in the original untransformed variable. Estimated response probabilities for real estate and machinery investments in the deregulated subsample model, which is corrected for heteroskedasticity, are reported in Table 7.16. I°
The response probabilities for positive investments with respect to output have plausible positive signs, but their magnitudes are negligible. Even though the probability of investing is increasing with output, it is insensitive to changes in output. This result is consistent with the results above, suggesting that farms have had excess capital. Thus, increased output has resulted in more intensive use and more efficient utilization of existing capital, but it has not necessarily driven up investments. Further, the result suggests that there are significant scale economies in utilizing the capital stock.
Most of the price effects have plausible signs. For example, negative own price effects suggest that investments have been decreasing with their own prices, as expected.
However, the magnitudes of the price effects are negligible, suggesting that investments have not been sensitive to prices. These results may signal that under fairly restrictive production controls then prices have not been dominant factors in determining investments.
The physical level of firms' capital and labor services have played a more important role in determining investments than the prices and the level of output. A ten percent unit increase in the farm's real estate capital, for example, has reduced its probability to invest in real estate about two percentage units. The probability of investing in real estate has been decreasing in the firm's actual real estate capital and labor services but increasing in machinery capital. In other words, excess real estate capital and labor has driven real estate investments down, but excess machinery capital
I° To reduce the number of tables in the text, the short-run response probabilities and elasticities are reported here only for the deregulated subsample model, which is corrected for heteroskedasticity. The results of the other two model specifications are given in Appendix B.
has driven real estate investment up. This result suggests that, in the short run, real estate and machinery capital have been complements, but real estate and labor services have been substitutes.
Gross investments in machinery have been increasing in the firm's actual machinery capital, because machinery depreciates and large replacement investments are required to maintain a capital stock of machinery. But still, the probability of a positive net investment in machinery has been decreasing with the actual machinery capital stock, as expected. Excess machinery capital has, in other words, been driving net investment in machinery down. Machinery investment has also been decreasing in labor services, which suggests that machinery and labor have been substitutes in the short run.
Excess real estate capital has, on the other hand, been driving machinery investment up.
This result again implies that machinery and real estate have been short-run complements, as explained above. It has to be noted, however, that we have maintained symmetry of the adjustment matrix resulting in sign-symmetric elasticities between capital stocks and labor.
Table 7.16. Response Probabilities for Positive Investments.
With
Log of output 0.00010 0.000089 0.000352 0.000417
Log of prices:
real estate -0.00192 -0.00170 0.00119 0.00140
machinery -0.00236 0.00209 -0.00576 -0.00682
wage rate 0.000086 0.000076 0.00289 0.00342
Capital'
real estate -0.166 -0.196 0.0755 0.0894
machinery 0.0192 0.0170 0.106 -0.0226
Labor b -0.0584 -0.0517 -0.0217 -0.0257
one percentage change around the sample average. The sample averages are 754,000 and 199,000 FIM.
b A one percentage change around the sample average. The sample average is 4,090 hours.
Elasticities
We define two kinds of elasticities: conditional elasticities and unconditional elasticities.
Conditional elasticity is conditioned on the exogenous state variables and, in addition, on positive gross investment. The unconditional elasticity is conditioned on the exogenous state variables, only. Elasticity estimates are presented in Tables 7.17 and 7. 1 8 .
As above in the case of the response probabilities, output and price elasticities have plausible signs in the sense that output and cross price elasticities are positive, but own price elasticities are negative. The magnitudes of these elasticities are, nevertheless,
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negligible. We conclude that investments have been inelastic with respect to the output level and prices. Again, the unplausibly low output elasticities may result from the stringent production controls that have influenced the connection between output changes and the level of investments. The observed range of output fluctuations may have resulted primarily in marginal adjustments of intensity in capital use, rather than lumpy investments. This phenomenon is also supported by the result that farms have been in excess capital relative to their output levels. Nevertheless, low unconditional output elasticities are consistent with significant economies of scale.
Unconditional elasticities of real estate, in particular, with respect to capital stocks and labor 'services are clearly larger in magnitude than the corresponding conditional elasticities. This suggests that the combined effects of a regime shift (from zero to positive investment) and an increase in investment size are important in measuring elasticities of real estate investments, whereas either one of these two responses alone shows relatively inelastic effects.
Real estate investment is decreasing and elastic with respect to its own capital stock. Elasticity estimates confIrm, again, that real estate investments are increasing considerably in excess machinery but decreasing in excess labor. In other words, elasticities show substantial short-run complementarity between real estate and machinery but short-run substitutability between real estate and labor as above.
The differences between the conditional and unconditional elasticities are not as large in machinery investments as in real estate investments, partly because the number of zero machinery investments in the data is small. The elasticity estimates in Table 7.18 show notable increase in the gross investment in machinery with respect to the increases in machinery capital. Net investment in machinery is, however, slightly decreasing with its own capital, as before. In addition, the elasticities show that machinery investment is increasing substantially with excess real estate capital, again signaling strong complementarity between real estate and machinery. Labor and machinery are, however, short-run substitutes, as excess labor will decrease machinery investments and slow down substitution of labor saving technologies for labor. It has not paid, for example, to invest in advanced feeding technologies if there has not been any alternative demand and income sources for the saved labor input.
Table 7.17. Short-Run Elasticities for Real Estate Investments.
With respect to
Gross investment Net investment
conditional unconditional conditional b unconditional
Output 0.000122 0.000509 0.000118 0.000544
Prices:
real estate -0.00233 -0.00976 -0.00226 -0.0104
machinery 0.00287 0.0120 0.00278 0.0128
wage rate 0.000105 0.000439 0.000102 0.000470
Capital:
real estate -0.202 -0.843 -0.260 -1.20
machinery 0.0233 0.0975 0.0226 0.104
Labor -0.0710 -0.297 -0.0687 -0.318
a Elasticities are evaluated at the sample means.
Expected investment is conditioned on the predetermined state variables and on positive gross investment.
Expected investment is conditioned on the predetermined state variables only.
Table 7.18. Short-Run Elasticities for Machinery Investments. a
With respect to
Gross investment Net investment
conditional b unconditional conditional b unconditional
Output 0.000693 0.00118 0.000659 0.00144
Prices:
real estate 0.00234 0.00398 0.00222 0.00486
machinery -0.0113 -0.0193 -0.0108 -0.0236
See notes in Table 7.16.
Changes in labor services are decreasing (becoming more negative), but inelastically, with the output and the wage rate in the short n.m (Table 7.19). The short-run response of labor with respect to the other prices is also negligible. The results suggest, however, that labor services are decreasing with excess capital and, in particular, with excess real estate. Further, labor services are decreasing elastically with excess labor services. Therefore, we can conclude that it is the firm's current capital stock and labor services which determine the short-run changes in labor services. The short-run effects of output and prices are negligible.
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Table 7.19. Short-Run Elasticities for Changes in Labor Services. a
With Full Sample Deregulated Subsample Deregulated Subsample
respect to Model Model Model Corrected for
Heteroskedasticity
Output -0.00422 -0.0108 -0.00727
Prices:
real estate -0.00236 -0.0299 0.000478
machinery 0.00480 0.0504 0.0191
wage rate -0.00150 -0.0137 -0.0103
Capital:
real estate -0.0711 -0.178 -0.182
machinery 0.0275 -0.0181 -0.0172
Labor -1.04 -1.31 -1.35
Computed at the parameter estitnates in the regime of negative changes in labor services. Elasticities are evaluated at sample means.