The general objective of this study is to develop an appropriate dynamic model of third generation for analyzing investment and adjustment costs in agriculture sector of Iran. In this study, input demand functions are estimated for agriculture sector during 1979-2004 using 3SLS method. An improved dynamic model was built on the basis of the cost of adjustment theory to estimate the impacts of production inputs on agricultural investment. The results indicate that the energy price has positive and significant impacts on agricultural investment while war and the ratio of investment to production in previous period have negative impacts. Furthermore, the results indicate that technology is labor intensive. Based on the results, the estimated coefficient for is the adjustment costs is equal to 315 for Iranian agriculture. It means that increasing investment to reach the equilibrium after a shock needs adjustment costs where the amount of this cost is at a rate of 157.54 which is high and so in case of a shock to the sector, farmers have to pay high costs to reach the previous position. The results also indicate that material input is complement with investment, energy and labor.

Keywords