Production, supply and factor shares: an application to estimating German long-run supply

This paper proposes a new framework for long-run supply estimation. We present a multi-sector model of imperfect competition with an otherwise common technology but sector-specific mark-ups, technical level and technical progress. The model accommodates many important (but often neglected) issues related to supply estimation—such as possible non-stationarity in the profit margin and factor-income share. It has been applied to Germany from the 1980s, accounting for the following notable characteristics: break and catch up process of unification, the relatively large decline in factor shares and a noticeable change in profit margins and sectoral output shares. Our approach provides a flexible way to estimate aggregate supply in the presence of changing factor and sectoral shares.