Ex post tests for short- and long-run optimization (Q1098218)

The purpose of this paper is to develop tests of long-run equilibrium models where the long-run is defined as the state where the observed levels of output and capital are consistent with optimizing behavior. We use the implied relationship between a restricted translog cost function and derive demand equations to provide a series of nested tests which can be interpreted as ex post tests for short- and long-run optimization behavior. A set of parameter restrictions on the translog system is specified for testing whether observable levels of capital and/or output of a firm correspond to the long-run optimal level. Our tests of the validity of long-run equilibrium specifications are based on data for 28 German industries for the period 1960-1981. For most of the industries the set of restrictions implied by long-run equilibrium had to be rejected.