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Estimating Production Functions When Productivity Change Is Endogenous

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  • Muendler, Marc-Andreas

Abstract

Production function estimation with micro-data shows that a persistent unobserved variable varies within firm or plant over time but resists treatment and may cause biases. This paper presents an estimation model of the firm under endogenous productivity change. The model implies that (i) the so-far untreated effect stems from firms' planned efficiency responses to the competitive environment and that (ii) a suit- able proxy to productivity is investment interacted with a sector-level competition variable. An application to Brazilian manufacturing firm data shows that this proxy and multivariate extensions yield coefficient estimates with considerably less noise in bootstraps than alternative proxies, while reducing the difference to fixed-effects estimation and remedying commonly suspected biases. Whereas productivity change is measured consistently, scale economies are not identified when produc- tivity and price are endogenous.

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Bibliographic Info

Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt0w02f5tw.

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Date of creation: 01 Feb 2004
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Handle: RePEc:cdl:ucsdec:qt0w02f5tw

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Keywords: Productivity;

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References

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  1. Benjamin E. Hermalin., 1991. "The Effects of Competition on Executive Behavior," Economics Working Papers 91-182, University of California at Berkeley.
  2. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
  3. Pedro Cavalcanti Ferreira & JosÈ Luiz Rossi, 2003. "New Evidence from Brazil on Trade Liberalization and Productivity Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1383-1405, November.
  4. Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
  5. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
  6. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  7. Tor Jakob Klette & Zvi Griliches, 1992. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Engogenous," NBER Working Papers 4026, National Bureau of Economic Research, Inc.
  8. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  9. G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc.
  10. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  11. Marc-Andreas Muendler, 2004. "Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986-1998," CESifo Working Paper Series 1148, CESifo Group Munich.
  12. Tybout, James & de Melo, Jamie & Corbo, Vittorio, 1991. "The effects of trade reforms on scale and technical efficiency : New evidence from Chile," Journal of International Economics, Elsevier, vol. 31(3-4), pages 231-250, November.
  13. Mirta N.S. Bugarin & Roberto Ellery Jr & Victor Gomes & Arilton Teixeira, 2002. "The Brazilian Depression in the 1980s and 1990s," Computing in Economics and Finance 2002 338, Society for Computational Economics.
  14. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February.
  15. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
  16. Simeon Djankov & Bernard Hoekman, 2000. "Market discipline and corporate efficiency: evidence from Bulgaria," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 190-212, February.
  17. Jan Boone, 2000. "Competitive Pressure: The Effects on Investments in Product and Process Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 549-569, Autumn.
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Citations

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Cited by:
  1. Doraszelski, Ulrich & Jaumandreu, Jordi, 2006. "R&D and productivity: Estimating production functions when productivity is endogenous," MPRA Paper 1246, University Library of Munich, Germany.
  2. David Greenstreet, 2007. "Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules," Economics Series Working Papers 345, University of Oxford, Department of Economics.
  3. Robert Breunig & Marn-Heong Wong, 2008. "A Richer Understanding of Australia's Productivity Performance in the 1990s: Improved Estimates Based Upon Firm-Level Panel Data," The Economic Record, The Economic Society of Australia, vol. 84(265), pages 157-176, 06.
  4. Robert Breunig & Marn-Heong Wong, 2004. "Australia's Firm-level Productivity - a New Perspective," Econometric Society 2004 Australasian Meetings 177, Econometric Society.
  5. Paz, Lourenco, 2012. "Trade liberalization and inter-industry productivity spillovers: an analysis of the 1989-1998 Brazilian trade liberalization episode," MPRA Paper 38859, University Library of Munich, Germany.

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