On Input Market Frictions and Estimation of Factors’ Demand

In this paper we explore the impact of imperfectly competitive input markets on production function estimation. First order pro…t maximizing conditions are altered when frictions in input markets cause the elasticity of input supply to the …rm to be …nite. A consequence of this is that the standard econometric model used for production function estimation will be misspeci…ed. We prove that, in all non trivial cases, …nite elasticities of supply to the …rm will lead to inconsistent estimates of production function parameters. Monte Carlo simulations show that the resulting bias can be economically signi…cant.