The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation
AbstractBased on a large panel of Czech manufacturing firms, we estimate firm-level production functions in 2003-2007 using the Levinsohn and Petrin (2003) and Wooldridge (2009) approaches, correcting for the measurement error in capital. We show that measurement error plays a significant role in the size of the estimated capital coefficient. The capital coefficient estimate approximately doubles (depending on the particular industry) when we control for capital measurement error. Consequently, while the majority of industries exhibit constant or (in)significantly decreasing returns to scale when the standard methods are used, increasing returns cannot be rejected in some industries when the estimation is corrected for capital measurement error.
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Bibliographic InfoPaper provided by Czech National Bank, Research Department in its series Working Papers with number 2011/09.
Date of creation: Nov 2011
Date of revision:
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Capital; firm-level data; measurement error.;
Other versions of this item:
- Lubomir Lizal & Kamil Galuščák, 2012. "The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation," William Davidson Institute Working Papers Series wp1026, William Davidson Institute at the University of Michigan.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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