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Estimation of the CES Production Function with Biased Technical Change: A Control Function Approach

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  • Xi CHEN
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    Abstract

    In this paper, I extend the Olley-Pakes (1996) estimation method to the CES production function with biased technical change. The new semi-parametric approach allows consistent estimation of the degree of returns to scale, the elasticity of substitution, and the bias in technical change. Identification of these parameters is achieved under the assumption that the data generating process reflects not only technologies but also optimizing behavior of producers. Using data from U.S. manufacturing industries over the period 1958-2005, I find strong evidence that industries are characterized by a production technology with the elasticity of substitution below one and with significant biased technical progress.

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    Bibliographic Info

    Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2012-20.

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    Date of creation: 2012
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    Handle: RePEc:ulp:sbbeta:2012-20

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    Keywords: Semi-parametric estimation; Panel data analysis; Returns to scale; Elasticity of substitution; Factor-augmenting technical change; Industry-level studies.;

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    1. Malley, Jim & Muscatelli, V. Anton, 1999. "Business cycles and productivity growth: Are temporary downturns productive or wasteful?," Research in Economics, Elsevier, Elsevier, vol. 53(4), pages 337-364, December.
    2. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February.
    3. Whitney Newey, 1999. "Flexible Simulated Moment Estimation of Nonlinear Errors-in-Variables Models," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 99-02, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Guido W. Imbens & Whitney K. Newey, 2002. "Identification and Estimation of Triangular Simultaneous Equations Models Without Additivity," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0285, National Bureau of Economic Research, Inc.
    5. Thursby, Jerry G & Lovell, C A Knox, 1978. "An Investigation of the Kmenta Approximation to the CES Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 363-77, June.
    6. Ilke Van Beveren, 2007. "Total factor productivity estimation: A practical review," LICOS Discussion Papers, LICOS - Centre for Institutions and Economic Performance, KU Leuven 18207, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    7. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0205, National Bureau of Economic Research, Inc.
    8. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
    9. Konings, Jozef & Vandenbussche, Hylke, 2008. "Heterogeneous Responses of Firms to Trade Protection," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6724, C.E.P.R. Discussion Papers.
    10. Smarzynska, Beata K., 2002. "Does foreign direct investment increase the productivity of domestic firms : in search of spillovers through backward linkages," Policy Research Working Paper Series, The World Bank 2923, The World Bank.
    11. Daron Acemoglu, 2000. "Labor- and Capital- Augmenting Technical Change," NBER Working Papers 7544, National Bureau of Economic Research, Inc.
    12. Heckman, James J. & Robb, Richard Jr., 1985. "Alternative methods for evaluating the impact of interventions : An overview," Journal of Econometrics, Elsevier, Elsevier, vol. 30(1-2), pages 239-267.
    13. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series, CESifo Group Munich 2234, CESifo Group Munich.
    14. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
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    Cited by:
    1. Xi Chen & Bertrand M. Koebel, 2013. "Fixed cost, variable cost, markups and returns to scale," Working Papers of BETA, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg 2013-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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