Richard Blundell () (Institute for Fiscal Studies and University College London) Steve Bond () (Institute for Fiscal Studies and Nuffield College, Oxford)
Additional information is available for the following
registered author(s):
We consider the estimation of Cobb-Douglas production functions using panel data covering a large sample of companies observed for a small number of time periods. Standard GMM estimators, which eliminate unobserved firm-specific e¤ects by taking first differences, have been found to produce unsatisfactory results in this context (Mairesse and Hall, 1996). We attribute this to weak instruments: the series on …rm sales, capital and employment are highly persistent, so that lagged levels are only weakly correlated with subsequent first differences. As shown in Blundell and Bond (1998), this can result in large finite-sample biases when using the standard first-differenced GMM estimator. Blundell and Bond (1998) also show that these biases can be dramatically reduced by exploiting reasonable stationarity restrictions on the initial conditions process. This yields an extended GMM estimator in which lagged first-differences of the series are also used as instruments for the levels equations (cf. Arellano and Bover, 1995). Using data for a panel of R&D-performing US manufacturing companies, similar to that in Mairesse and Hall (1996), we show that the instruments available for the production function in first differences are indeed weak. We find that the additional instruments used in our extended GMM estimator appear to be both valid and informative in this context; this estimator yields much more reasonable parameter estimates. We also stress the importance of allowing for an autoregressive component in the productivity shocks.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number
W99/04.
Length: 24 pp. Date of creation: Feb 1999 Date of revision: Handle: RePEc:ifs:ifsewp:99/04
Contact details of provider: Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE Phone: (+44) 020 7291 4800 Fax: (+44) 020 7323 4780 Email: Web page: http://www.ifs.org.uk
Order Information: Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE Email:
For technical questions regarding this item, or to correct its listing, contact: (Emma Hyman).
Find related papers by JEL classification: C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
This paper has been announced in the following NEP Reports:
References listed on IDEAS 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.:
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.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.