Demand uncertainty and the capital–labour ratio in Poland

Green, Christopher J.; Lensink, Robert; Murinde, Victor

Abstract

This paper investigates the effect of demand uncertainty on the capital–labour ratio of non-financial firms in Poland. An eclectic model is used to characterise a utility maximising firm in a transition economy with demand uncertainty and imperfect competition. It is assumed that labour is completely variable and capital is quasi-fixed. The demand for capital, and hence the capital–labour ratio, derives from the optimisation of expected costs and the firm's pricing and output decisions, and crucially depends on the sign of the covariance term, i.e. the firm's risk behaviour. The main testable proposition of the model is that if firms are risk-lovers, an increase in demand uncertainty increases the capital–labour ratio, whereas the capital–labour ratio decreases when firms are risk-averse. The model is estimated using data from a cross-section of 148 non-financial firms in Poland. The results unambiguously show that there exists a significant positive relationship between demand uncertainty and the capital–labour ratio. This finding suggests that Polish firms are risk-lovers, i.e. they respond to demand uncertainty by increasing their capital–labour ratio because they are more concerned to have stable labour costs than they are to have stable profits. The evidence has important implications for the needed set of regulations and corporate governance in Poland as part of the necessary economic reform.

Citation

Green, C. J., Lensink, R., & Murinde, V. (2001). Demand uncertainty and the capital–labour ratio in Poland. Emerging Markets Review, 2(2), 184-197. https://doi.org/10.1016/S1566-0141%2801%2900016-4

• Journal Article Type: Article
• Acceptance Date: Mar 15, 2001
• Publication Date: Jun 28, 2001
• Deposit Date: May 21, 2017
• Journal: Emerging Markets Review
• Print ISSN: 1566-0141
• Electronic ISSN: 1873-6173
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 2
• Issue: 2
• Pages: 184-197
• DOI: https://doi.org/10.1016/S1566-0141%2801%2900016-4