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Imposing Linear Homogeneity on Box-Tidwell Flexible Functional Forms

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  • Shin, Richard T
  • Ying, John S

Abstract

The authors consider two forms of the Box-Tidwell cost function, which uses the increasingly popular Box-Cox metric. If the dependent variable is the logarithm of cost, the function violates the regularity condition of homogeneity in factor prices, globally and locally. If cost is transformed by the Box-Cox metric, global homogeneity requires highly restrictive parameter constraints such that the model is no longer flexible, while local homogeneity is satisfied at only the base point of approximation. The authors demonstrate that normalizing the first model by the deleted factor price alters the model so that estimates are no longer invariant.

Suggested Citation

  • Shin, Richard T & Ying, John S, 1994. "Imposing Linear Homogeneity on Box-Tidwell Flexible Functional Forms," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 261-265, April.
    • Handle: RePEc:bes:jnlbes:v:12:y:1994:i:2:p:261-65
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    Cited by:

    1. Sherrill Shaffer, 1998. "Functional Forms and Declining Average Costs," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(2), pages 91-115, October.

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