This paper explores the inconsistency of common scale estimators when output is proxied by deflated sales, based on a common output deflator across firms. The problems arise when firms operate in an imperfectly competitive environment and prices differ between firms. In particular, we show that this problem reveals itself as a downward bias in the scale estimates obtained from production function regressions, under a variety of assumptions about the pattern of technology, demand and factor price shocks. The result also holds for scale estimates obtained from cost functions. The analysis is carried one step further by adding a model of product demand. Within this augmented model we examine the probability limit of the scale estimate obtained from an ordinary production function regression. This analysis reveals that the OLS estimate will be biased towards unity - or possibly a value below unity. We have included an empirical section which illustrates the issues. The empirical analysis presents a tentative approach to avoid the problems discussed in the theoretical part of this paper.
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Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number
127.
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
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.:
Bartelsman, E.J. & Caballero, R.J. & Lyons, R.K., 1991.
"Short and Long Run Externalities,"
Papers
91-18, Columbia - Graduate School of Business.
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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.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.