| Sumario: | This is a study of interrelated demand for capital and labor. In a purely static model capital and labor demand functions will usually contain common production function parameters and prices and thus may be viewed as a system of interrelated equations. There are two additional reasons why the interrelated characteristic may be important in a dynamic disequilibrium model. First, if one input is less than a desired or long-run equilibrium value, demand for other inputs may be dependent on the shortage of the first input. Second, the actual process of adjustment may influence demand for other inputs via costs of adjustment. In this article the authors develop and estimate parameters of labor and capital demand functions where both the deviation of capital from a target value and costs of adjustment influence labor demand. There are basically two approaches to obtaining the flexible accelerator relationship in previous empirical studies. The adjustment mechanism may be assumed to represent or approximate optimal short-run behavior where a basically static model yields only long-run solutions for the inputs. The model assumes inputs are chosen to minimize the cost of producing an exogenous output requirement over an infinite planning horizon. A flexible accelerator adjustment mechanism that incorporates technical progress and expected output growth is assumed to be globally optimal for capital investment.
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