Estimating Production Functions When Productivity Change is Endogenous
AbstractProduction 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 productivity and price are endogenous.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1143.
Date of creation: 2004
Date of revision:
Other versions of this item:
- Muendler, Marc-Andreas, 2004. "Estimating Production Functions When Productivity Change Is Endogenous," University of California at San Diego, Economics Working Paper Series qt0w02f5tw, Department of Economics, UC San Diego.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-05-02 (All new papers)
- NEP-DEV-2004-05-02 (Development)
- NEP-EFF-2004-06-02 (Efficiency & Productivity)
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