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Adjustment costs and the identification of Cobb Douglas production functions

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Author Info
Steve Bond () (Institute for Fiscal Studies and Nuffield College, Oxford)
Måns Söderbom

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Abstract

Cobb Douglas production function parameters are not identified from cross-section variation when inputs are perfectly flexible and chosen optimally, and input prices are common to all firms. We consider the role of adjustment costs for inputs in identifying these parameters in this context. The presence of adjustment costs for all inputs allows production function parameters to be identified, even in the absence of variation in input prices. This source of identification appears to be quite fragile when adjustment costs are deterministic, but more useful in the case of stochastic adjustment costs. We illustrate these issues using simulated production data.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W05/04.

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Length: 30 pp.
Date of creation: Feb 2005
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Handle: RePEc:ifs:ifsewp:05/04

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Related research
Keywords: Production functions adjustment costs identification

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Find related papers by JEL classification:
D20 - Microeconomics - - Production and Organizations - - - General
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-94, April.
  3. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November. [Downloadable!] (restricted)
  4. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257. [Downloadable!] (restricted)
  6. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor and Francis Journals, vol. 19(3), pages 321-340. [Downloadable!] (restricted)
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  7. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Blackwell Publishing, vol. 70(2), pages 317-341, 04. [Downloadable!] (restricted)
  8. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Benoit Dostie, 2006. "Wages, Productivity and Aging," Cahiers de recherche 0645, CIRPEE. [Downloadable!]
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  2. Christine Greenhalgh & Mark Rogers, 2007. "Trade Marks and Performance in UK Firms: Evidence of Schumpeterian Competition through Innovation," Economics Series Working Papers 300, University of Oxford, Department of Economics. [Downloadable!]
  3. Ralf Martin, 2005. "Computing the True Spread," CEP Discussion Papers dp0692, Centre for Economic Performance, LSE. [Downloadable!]
  4. Yuriy Gorodnichenko, 2007. "Using Firm Optimization to Evaluate and Estimate Returns to Scale," NBER Working Papers 13666, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Helen Simpson, 2007. "Productivity in Public Services," The Centre for Market and Public Organisation 07/164, Department of Economics, University of Bristol, UK. [Downloadable!]
  6. Mark Rogers, 2006. "R&D and Productivity in the UK: evidence from firm-level data in the 1990s," Economics Series Working Papers 255, University of Oxford, Department of Economics. [Downloadable!]
  7. Coviello, Decio & Islam, Roumeen, 2006. "Does aid help improve economic institutions ?," Policy Research Working Paper Series 3990, The World Bank. [Downloadable!]
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