The usual approach to measuring profits and productivity assumes that the level of all inputs and outputs can be changed instantaneously to the optimum. Investment in capital assets is necessary for business survival in the long run, for it increases future profits and productivity through expansion of production possibilities. Yet, in the short run, it decreases profits and productivity because of adjustment costs associated with sluggish adjustment of the capital stock. Addressing the limitations of the static approach, the current paper analyzes and links profits and productivity in a dynamic context. An application to a large sample of French meat processors illustrates the potency of our theoretical framework.
(co-authored with Pieter Jan Kerstens, Federal Planning Bureau in Belgium)