The implications of multiple relative factor price regions extend into the industrial organization and productivity literatures as well. If regions in the US face substantially different factor prices, then many estimates of industry production functions that assume common factor prices are misspecified. This is likely to feed into calculations of productivity and markups at both the plant and industry levels.
In this paper, we add to a growing literature on factor price equality. This research began with Samuelson (1949), who noted that two countries’ factor rewards will be equal if their endowments vary less than industry input intensities. This insight, derived from a model with two goods and two factors, sparked efforts by Mckenzie (1955), Dixit and Norman (1980), Wu (1987) and Deardorff (1992) to generalize the necessary conditions for factor price equality to an arbitrary number of countries, goods and factors. Debaere and Demiroglu (1997) find a violation of these conditions in a cross section of countries, and interpret this result as evidence that developed and developing countries inhabit distinct cones of diversification. In compementary work, Repetto and Ventura (1998) show that international productivity-adjusted wages vary significantly across countries in a manner consistent with the existence of a multiple cone world.
More recent efforts have investigated alternate implications of factor price equality as well as its applicability to regions within countries. Schott (1999, 2000), for example, finds that countries tend to enter and exit sectors in a manner consistent with movement through multiple cones of diversification. Digging deeper into this Rybczynski adjustment mechanism, Bernard and Jensen (2000b) find that US plant closures occur more frequently in regions that are experiencing rapidly changing relative factor supplies and in industries with factor requirements at odds with the new supplies.