Hetemäki, Lauri
(The Society of Forestry in Finland - The Finnish Forest Research Institute, 1990)
The sensitivity was analysed of factor demand in the Finnish pulp and paper industry to changes in relative factor prices and technical change. Factor demand equations were derived using neoclassical production theory, and factor demand was then analysed using annual time series data for 1960-86. The relations of factor demands and their prices were examined in terms of own price, cross price and substitution elasticities. It was assumed that the 'representative firm' in the pulp and paper industry minimizes its costs of production at a given output level. In addition, a number of other assumptions were made which enabled production technology to be represented by a cost function, in which the inputs are capital, labour, energy and raw materials. Ten data categories were used for pulp industry estimates, including roundwood input in million msuperscript 3 and roundwood stumpage price index, a weighted average (by cost shares) of prices for pine, spruce and non-coniferous pulpwood, and wood chips/particles; nine categories were used for paper industry estimates. From the cost function, the factor demand equations, i.e. the cost share equations, were derived by applying Shephard's lemma. The study differs from previous factor demand studies by applying the error correction model based on the Granger Representation Theorem and the results of the cointegration literature to model the dynamics of the factor demand. This approach provides a statistically consistent method for estimating the long-run static factor demand equations and the corresponding short-run equations. The results indicate that the error correction approach can be applied to estimations of the factor demands for the pulp and paper industry. In both industry sectors, the adjustment to short run disequilibrium (price shocks) appears to be fairly rapid. The factor demands of the pulp and paper industries clearly react to changes in factor prices and there are significant substitution possibilities between the different inputs. The absolute values of the elasticities are, on average, larger than have been obtained in previous studies.