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The Econometric Specification of Input Demand Systems Implied by Cost Function Representations

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  • Keith R. McLaren

    ()

  • Xueyan Zhao

    ()

Abstract

In the case of input demand systems based on specification of technology by a Translog cost function, it is common to estimate either a system of share equations alone, or to supplement them by the cost function. By adding up, one of the share equations is excluded. In this paper it is argued that a system of n-1 share equations is essentially incomplete, whereas if the n-1 share equations are supplemented by the cost function the implied error structure is inadmissible. Similarly, if the technology is specified by a normalized quadratic cost function, it is common to estimate either a system of n-1 demand equations alone, or to supplement them by the cost function. In both cases, the implied error structure is again inadmissible.

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File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2009/wp3-09.pdf
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Bibliographic Info

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 3/09.

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Length: 14 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:msh:ebswps:2009-3

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Related research

Keywords: Cost Function; Input demands; Share equations; Translog; Normalized Quadratic; Error specification.;

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  1. Diewert, W E & Wales, T J, 1988. "Normalized Quadratic Systems of Consumer Demand Functions," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(3), pages 303-12, July.
  2. Diewert, Walter E & Wales, Terence J, 1987. "Flexible Functional Forms and Global Curvature Conditions," Econometrica, Econometric Society, vol. 55(1), pages 43-68, January.
  3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  4. Fuss, Melvyn A., 1977. "The demand for energy in Canadian manufacturing : An example of the estimation of production structures with many inputs," Journal of Econometrics, Elsevier, vol. 5(1), pages 89-116, January.
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