Quasi-fixed inputs in the Italian manufacturing: The case of the pharmaceutical industry

The aim of this paper is to study the demand for inputs in the Italian manufacturing, using firm-level data on pharmaceutical industry. The Italian pharmaceutical industry is characterized by the existence of long-term labor contracts, and this fact suggests to consider labor as quasi-fixed input. In order to characterize firms behavior we base our analysis on the restricted Generalized Leontief cost function. The choice of this flexible functional form is due to its ability to capture the input substitution patterns in presence of more than one quasi-fixed input. Therefore demand and substitution elasticities are estimated with respect to two different theoretical models: the first, QFI (1), with capital as quasi-fixed input and the second, QFI (2), with two quasi-fixed inputs, capital and labor. The choice among the two alternative specifications is based on an elasticity comparison criterion, since the two models are not nested. The results suggest a rigid productive structure during the period under observation. Our results confirm the a priori on the labor market rigidity and point out the high heterogeneity between the firms, even controlling for size and nationality.