On the cost‐reducing effects of embodied technical progress: a panel study of the steel industry in Japan

To explicitly explain the cost‐reducing effects of technical progress experienced by each firm, we assume that technical progress, namely, the prevalence of particular equipment, can be expressed by a function of logarithmic physical capital. Regarding the technology cost structure, we propose a modified dynamic cost function model that consists of the above equation, the translog variable cost equation containing technical progress as one of the factors, and Euler equations with respect to physical and research and development capital stocks. Using data on eight firms in the Japanese electric‐furnace steel industry for the period 1970–1998, the model was empirically validated using the generalized method of moments. An elasticity of production cost with respect to technical progress showed a cost‐reducing effect. This fact was influenced by the type of product and the extent of each firm’s R&D. Also derived from this model is one reasonable phenomenon of business‐cyclically changing the use of endogenous capacity. This economic information supports the appropriateness of the above model, including the assumption of transforming technical progress into an endogenous variable, and the methods of analysis.