Modelling regional producer behaviour

Departing from theoretical principles of duality between production technology and costs, this study provides some suggestions on how to address regional aspects in empirical analyses of producer behaviour. Having established some general properties of the translog cost function, it is illustrated how dummy variable techniques may be applied to incorporate various regional technological characteristics into an integrated empirical model. The model is then used to illustrate and discuss different specifications of producer behaviour.

The first elements to be integrated in the regional framework are technological change, productivity growth, and spatial features. Different sources of regional productivity growth are discussed, and their measurement in the regional econometric cost function is then considered.

Second, the attention is drawn towards problems concerning measurement and modelling of regional labour demand. Regional labour markets have some special characteristics that require special attention. These include labour heterogeneity, differents forms of rigidity, and adjustment costs. The significance of these aspects is discussed within the dual approach to regional producer behaviour.

Third, regional investments and capital formation is introduced, largely motivated by the need for a framework to analyze regional producer behaviour in the long run. This provides a tool for empirical analysis of the links between public policy, investment incentives and the process of industrial localization.

Finally, the implications of sluggishly adjusting input demands are adressed within the regional cost function approach. As both labour and capital may be viewed as quasi-fixed, a dynamic approach is required for analyses of the different adjustment mechanisms. However, the technology of adjustment may also vary systematically from region to region. Two approaches are presented and compared in the treatment of dynamic factor demands.