Why do we estimate production function

How will the aggregate productivity of China and India change if the degree of misallocation is reduced to the U. To do so, the authors measure the revenue productivity of firms, which should be the same across firms within an industry if there were no distortion, and the measurement of the revenue productivity requires to estimate the production function. Do geographic, institutional, cultural, and human capital factors explain the difference across regions? To do so, the authors estimate the plant-level production function of the U.

De Loecker : Does the removal of trade barriers induces efficiency gain for producers? To do so, the author estimate the production functions of Belgian textile industry during in which the degree of trade protection can affect the productivity level. To do so, the authors first estimate the production function and productivity of manufacturing firms in developed countries, and then study how the independently measured management practices of the firms affect the estimated productivity.

To do so, the authors estimate the production function for various outputs including the physical output, return on capital and labor, and the utilization rate, price level, using the cotton spinners data in Japan during and Add cost minimization. Add profit maximization. Primitive enough to be invariant to relevant policy changes. If you conduct a policy experiment that changes the factor market structure, identifying cost functions is not enough.

As reduced-form as possible among such specifications. A reduced-form parameter usually can be rationalized by a class of underlying structural parameters and institutional assumptions. Thus, the analysis becomes robust to some misspecifications. If we derive a cost function from a production function and a factor market structure, then the cost function cannot represent such a non-optimization behavior. This can be regarded as a first-order log-linear approximation of a production function. Linear regression model!

May OLS work? Temporarily abstract away from entry and exit. The data is balanced. Panel data. First-order condition for inputs. Instrumental variable. Daniel A. Problem: Restrictive heterogeneity. When there are measurement errors, fixed-effect estimator can generate higher biases than OLS estimator, because measurement errors more likely to survive first-difference and within-transformation. Closely related to the cost function estimation literature.

Need to specify the factor market structure and the nature of the optimization problem for a firm. One candidate for the instrumental variables: input prices.

Input price affect input decision. Problems: Input prices often lack cross-sectional variation. Cross-sectional variation is often due to unobserved input quality.

Another candidate for the instrumental variables: lagged inputs. This assumption characterizes and distinguishes labor and capital. Intuitively, it takes a full period for new capital to be ordered, delivered, and installed. No across firm unobserved heterogeneity in adjustment cost of capital, in demand and labor market conditions, or in other parts of the production function.

Okay with across time unobserved heterogeneity. Note that measurement issues may arise and that it is important to be explicit about how one is to interpret 'production', 'labour' and 'capital', and how to measure them. If it is real data, think about the following question.

Has the dataset been wrongly registered? As per the previous answer from EconJohn , the log-linear form of the production function then lends itself to regression analysis. With the Cobb-Douglas form of a production function i. If your data is heteroskedastic, log-linearizing the production function will produce biased and inconsistent parameter estimates.

This is because you are attempting to log-linearize a multiplicative error mean 1 into an additive error mean zero , yet the expectation of the mean of a random variable is not the same as the mean of the expectation by Jensen's inequality. Sign up to join this community. The best answers are voted up and rise to the top.

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