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Imposing Regularity Conditions On A System Of Cost And Factor Share Equations

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  • Griffiths, William E.
  • O'Donnell, Christopher J.
  • Cruz, Agustina Tan

Abstract

Systems of equations comprising cost functions and first-order derivative equations are often used to estimate characteristics of production technologies. Unfortunately, many estimated systems violate the regularity conditions implied by economic theory. Sampling theory methods can be used to impose these conditions globally, but these methods destroy the flexibility properties of most functional forms. We demonstrate how Bayesian methods can be used to maintain flexibility by imposing regularity conditions locally. The Bayesian approach is used to estimate a system of cost and share equations for the merino-woolgrowing sector. The effect of local imposition of monotonicity and concavity on the signs and magnitudes of elasticities is examined.

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Bibliographic Info

Paper provided by University of New England, School of Economics in its series Working Papers with number 12925.

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Date of creation: 1999
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Handle: RePEc:ags:uneewp:12925

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Keywords: Cost functions; Markov Chain Monte Carlo; inequality constraints; Demand and Price Analysis;

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