Dynamic Analysis of Production

A parable of economic life is that some factors can adjust rapidly while others adjust slowly in a given time scale. Focusing on production analysis in the dynamic setting leads us to emphasize the technology specification that permits the theoretical construction that can be translated and amenable to empirical implementation. A historical perspective of the framing the dynamic decision-making is reviewed. The adjustment cost model of the investment is the key conceptual feature as it can be incorporated into the formal structure of a production technology, which offers the opportunity to exploit primal-dual theory in both analysis and empirical implementation. An overview of empirical formulations in both econometric (parametric) and nonparametric settings is discussed. Dynamic production decision environment allows explicitly for the evolution of assets implying firms may not be in long-run equilibrium at a given point in time. The dynamic generalizations of modern production theory concepts measuring economic performance are reviewed given the need to properly account and value the factors that are out of equilibrium. Empirical nonparametric and parametric approaches are addressed at length. While these cases can be addressed relatively easily within a nonparametric, dynamic data envelopment analysis setting, econometric formulations are a greater challenge