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Estimating complex production functions: the importance of starting values

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  • Neal, Mark

Abstract

Production functions that take into account uncertainty can be empirically estimated by taking a state contingent view of the world. Where there is no a priori information to allocate data amongst a small number of states, the estimation may be carried out with finite mixtures model. The complexity of the estimation almost guarantees a large number of local maxima for the likelihood function. However, it is shown, with examples, that a variation on the traditional method of finding starting values substantially improves the estimation results. One of the major benefits of the proposed method is the reliable estimation of a decision maker’'s ability to substitute output between states, justifying a preference for the state contingent approach over the use of a stochastic production function.

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Paper provided by Australian Agricultural and Resource Economics Society in its series 2007 Conference (51st), February 13-16, 2007, Queenstown, New Zealand with number 10435.

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Date of creation: 2007
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Handle: RePEc:ags:aare07:10435

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Keywords: Production function; econometrics; starting values; state contingent production; Production Economics;

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