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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. Levinsohn, J., 1991. "Testing the Imports-As-Market-Discipline Hypothesis," Working Papers, Research Seminar in International Economics, University of Michigan 272, Research Seminar in International Economics, University of Michigan.
  2. Boone, J., 2000. "Competitive pressure: The effects on investments in product and process innovation," Open Access publications from Tilburg University urn:nbn:nl:ui:12-84400, Tilburg University.
  3. Tor Jakob Klette & Zvi Griliches, 1994. "The Inconsistency of Common Scales Estimators when Output Prices are Unobserved and Endogenous," Discussion Papers, Research Department of Statistics Norway 127, Research Department of Statistics Norway.
  4. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 19(3), pages 321-340.
  5. 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.
  6. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  7. 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.
  8. Tybout, James & de Melo, Jaime & Corbo, Vittorio, 1990. "The effects of trade reforms on scale and technical efficiency : new evidence from Chile," Policy Research Working Paper Series 481, The World Bank.
  9. Zvi Griliches & Jacques Mairesse, 1995. "Production Functions: The Search for Identification," NBER Working Papers 5067, National Bureau of Economic Research, Inc.
  10. Marc-Andreas Muendler, 2004. "Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986-1998," CESifo Working Paper Series 1148, CESifo Group Munich.
  11. Benjamin E. Hermalin, 1992. "The Effects of Competition on Executive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 350-365, Autumn.
  12. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1382, C.E.P.R. Discussion Papers.
  13. 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.
  14. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics, University of Munich, Department of Economics 19772, University of Munich, Department of Economics.
  15. 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, Society for Computational Economics 338, Society for Computational Economics.
  16. 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.
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Cited by:
  1. Ulrich Doraszelski & Jordi Jaumandreu, 2007. "R&D and productivity : estimating production functions when productivity is endogenous," Economics Working Papers we078652, Universidad Carlos III, Departamento de Economía.
  2. 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.
  3. Robert Breunig & Marn-Heong Wong, . "Australia's firm-level productivity -- a new perspective," Australasian Stata Users' Group Meetings 2004, Stata Users Group 2, Stata Users Group.
  4. 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.
  5. 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.

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