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Adjustment Costs and the Identification of Cobb Douglas Production Functions

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Author Info
Stephen Bond () (Institute for Fiscal Studies and Nuffield College, Oxford)
Måns Söderbom (Centre for the Study of African Economies, Department of Economcis, University of Oxford, and Institute for Fiscal Studies)

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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 Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W04.

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Length: 28 pages
Date of creation: 31 Jan 2005
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Handle: RePEc:nuf:econwp:0504

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  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)
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  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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  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. Coviello, Decio & Islam, Roumeen, 2006. "Does aid help improve economic institutions ?," Policy Research Working Paper Series 3990, The World Bank. [Downloadable!]
  7. 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!]
  8. Fernandes, Ana M. & Paunov, Caroline, 2008. "Foreign direct investment in services and manufacturing productivity growth: evidence for Chile," Policy Research Working Paper Series 4730, The World Bank. [Downloadable!]
  9. 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!]
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