Parametric tests for static and dynamic equilibrium

Econometric estimates of the characteristics of production are highly sensitive to the choice of dynamic specification. In this paper we propose a new approach for testing whether inputs are in static equilibrium. The procedure, which is based on the use of a generalized cost function, tests for divergences between the actual and static equilibrium quantities of all inputs simultaneously and symmetrically. We apply it to two widely used data sets, one at a high level of aggregation and the other at the firm level, and strongly reject static equilibrium in both cases.