Dynamic Factor Demand Schedules for Labor and Capital Under Rational Expectations

Dynamic factor demand schedules for labor and capital are drived assumint a representative firm maximizes the present value of expected profit when factor inputs are subject to increasing marginal adjustment costs. The analysis is an extension of Sargent's (1978) one factor model of labor demand. The derived factor demand equations are jointly estimated with the autoregressive processes for the real wage and the rental price of capital, and the cross equation restrinctions imlied by the rational expactations hypothesis are imposed. Both the order of the factor price autoregressions and the structural parameters of the models are estimated. A hypothesis thest of the overidentifying restrings results in marginal rejection of the theoretical restrictions implied by the rational expectations hypothesis.