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Imposing Regularity Conditions On A System Of Cost And Factor Share Equations

  • Griffiths, William E.
  • O'Donnell, Christopher J.
  • Cruz, Agustina Tan

Systems of equations comprising cost functions and first-order derivative equations are often used to estimate characteristics of production technologies. Unfortunately, many estimated systems violate the regularity conditions implied by economic theory. Sampling theory methods can be used to impose these conditions globally, but these methods destroy the flexibility properties of most functional forms. We demonstrate how Bayesian methods can be used to maintain flexibility by imposing regularity conditions locally. The Bayesian approach is used to estimate a system of cost and share equations for the merino-woolgrowing sector. The effect of local imposition of monotonicity and concavity on the signs and magnitudes of elasticities is examined.

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File URL: http://purl.umn.edu/12925
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Paper provided by University of New England, School of Economics in its series Working Papers with number 12925.

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Date of creation: 1999
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Handle: RePEc:ags:uneewp:12925
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  13. repec:cup:cbooks:9780521314275 is not listed on IDEAS
  14. Terrell, Dek, 1996. "Incorporating Monotonicity and Concavity Conditions in Flexible Functional Forms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(2), pages 179-94, March-Apr.
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