Staff Report 325

A Theory of Factor Allocation and Plant Size

Thomas J. Holmes | University of Minnesota, Federal Reserve Bank of Minneapolis
Matthew F. Mitchell

Published October 1, 2003

In this paper we develop a theory of how factors interact at the plant level. The theory has implications for (1) the micro foundations for capital-skill complementarity, (2) the relationship between factor allocation and plant size, and (3) the effects of trade and growth on the skill premium. The theory is consistent with certain facts about factor allocation and factor price changes in the 19th and 20th centuries.

Published In: RAND Journal of Economics (Vol. 39, No. 2, Summer 2008, pp. 329-351)

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