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Estimating Production Functions with Heterogeneous Firms

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  • Salvador Navarro

    (University of Wisconsin-Madison)

  • David Rivers

    (University of Wisconsin-Madison)

  • Amit Gandhi

    (University of Wisconsin-Madison)

Abstract

We present a new approach to the estimation of production functions that allows for richer patterns of firm heterogeneity than can be accommodated under the proxy variable methods of and Olley/Pakes and Levinsohn/Petrin. In particular, we show that the economics of the firms static input choice contains the necessary identifying information to control for the endogeneity problem in the production function. From an econometric point of view, our estimation proceeds in a single GMM step, and thus standard asymptotic standard errors are available. We consider the identification and estimation of models with heterogeneity in both input and output prices, as well as heterogeneity in factor specific productivity. Our empirical results show that we control for more of the endogeneity problem than the proxy variable approach, resulting in estimates of labor productivity nearly half as small.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 935.

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Date of creation: 2008
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Handle: RePEc:red:sed008:935

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  1. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
  2. Fox, Jeremy T. & Smeets, Valérie, 2007. "Do Input Quality and Structural Productivity Estimates Drive Measured Differences in Firm Productivity?," Working Papers 07-2, University of Aarhus, Aarhus School of Business, Department of Economics.
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