Separability of fixed inputs in differential systems

Abstract

This paper develops a differential demand system which involves fixed production inputs without the assumption that these are separable (strongly or weakly) from the perfectly variable inputs. This allows the allocation decisions for the perfectly variable inputs to depend on the intensity of use of the fixed inputs. It also allows testing for separability of fixed inputs through
simple parameter restrictions. The differential input demand system has been applied to the agricultural sector in Greece for the period 1961-97. The null hypothesis of separability between Land and Capital (fixed inputs) and all the variable inputs have been decisively rejected suggesting that the intensity of use of Land and Capital do affect the allocation decisions for the variable inputs.

JEL Classification: C3, D21