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The Structure Of Production Technology Productivity And Aggregation Effects

  • Phoebus J Dhrymes
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    This is a sequel to an earlier paper by the author, Dhrymes (1990). Using the LRD sample, that paper examined the adequacy of the functional form specifications commonly employed in the literature of US Manufacturing production relations. The "universe" of the investigation was the three digit product group; the basic unit of observation was the plant; the sample consisted of all "large" plants, defined by the criterion that they employ 250 or more workers. The study encompassed three digit product groups in industries 35, 36 and 38, over the period 1972-1986, and reached one major conclusion: if one were to judge the adequacy of a given specification by the parametric compatibility of the estimates of the same parameters, as derived from the various implications of each specification, then the three most popular (production function) specifications, Cobb-Douglas, CES and Translog all fell very wide of the mark. The current paper focuses the investigation on two digit industries (but retains the plant as the basic unit of observation), i.e., our sample consists of all "large" manufacturing plants, in each of Industry 35, 36 and 38, over the period 1972-1986. It first replicates the approach of the earlier paper; the results are basically of the same genre, and for that reason are not reported herein. Second, it examines the extent to which increasing returns to scale characterize production at the two digit level; it is established that returns to scale at the mean, in the case of the translog production function are almost identical to those obtained with the Cobb-Douglas function.1 Finally, it examines the robustness and characteristics of measures of productivity, obtained in the context of an econometric formulation and those obtained by the method of what may be thought of as the "Solow Residual" and generally designated as Total Factor Productivity (TFP). The major finding here is that while there are some differences in productivity behavior as established by these two procedures, by far more important is the aggregation sensitivity of productivity measures. Thus, in the context of a pooled sample, introduction of time effects (generally thought to refer to productivity shifts) are of very marginal consequence. On the other hand, the introduction of four digit industry effects is of appreciable consequence, and this phenomenon is universal, i.e., it is present in industry 35, 36 as well as 38. The suggestion that aggregate productivity behavior may be largely, or partly, an aggregation phenomenon is certainly not a part of the established literature. Another persistent phenomenon uncovered is the extent to which productivity measures for individual plants are volatile, while two digit aggregate measures appear to be stable. These findings clearly calls for further investigation.

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    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 91-5.

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    Date of creation: Aug 1991
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    Handle: RePEc:cen:wpaper:91-5
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    1. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-83, June.
    2. Friedman, James W, 1973. "Concavity of Production Functions and Non-Increasing Returns to Scale," Econometrica, Econometric Society, vol. 41(5), pages 981-84, September.
    3. Hildenbrand, Werner, 1981. "Short-Run Production Functions Based on Microdata," Econometrica, Econometric Society, vol. 49(5), pages 1095-1125, September.
    4. Fuss, Melvyn A. & Gupta, Vinod K., 1981. "A cost function approach to the estimation of minimum efficient scale, returns to scale, and suboptimal capacity : With an application to Canadian manufacturing," European Economic Review, Elsevier, vol. 15(2), pages 123-135.
    5. Simmons, Peter & Weiserbs, Daniel, 1979. "Translog Flexible Functional Forms and Associated Demand Systems," American Economic Review, American Economic Association, vol. 69(5), pages 892-901, December.
    6. Blair, Roger D & Kraft, John, 1974. "Estimation of Elasticity of Substitution in American Manufacturing Industry from Pooled Cross-Section and Time-Series Observations," The Review of Economics and Statistics, MIT Press, vol. 56(3), pages 343-47, August.
    7. Raymond J. Kopp & V. Kerry Smith, 1980. "Measuring Factor Substitution with Neoclassical Models: An Experimental Evaluation," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 631-655, Autumn.
    8. Ringstad, Vidar, 1974. "Some Empirical Evidence on the Decreasing Scale Elasticity," Econometrica, Econometric Society, vol. 42(1), pages 87-101, January.
    9. Guilkey, David K & Lovell, C A Knox & Sickles, Robin C, 1983. "A Comparison of the Performance of Three Flexible Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 591-616, October.
    10. Razin, Assaf, 1974. "A Note on the Elasticity of Derived Demand Under Decreasing Returns," American Economic Review, American Economic Association, vol. 64(4), pages 697-700, September.
    11. Clark, Peter K & Haltmaier, Jane T, 1985. "The Labor Productivity Slowdown in the United States: Evidence from Physical Output Measures," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 504-08, August.
    12. 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.
    13. Guilkey, David K & Lovell, C A Knox, 1980. "On the Flexibility of the Translog Approximation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 137-47, February.
    14. Hanoch, Giora, 1975. "The Elasticity of Scale and the Shape of Average Costs," American Economic Review, American Economic Association, vol. 65(3), pages 492-97, June.
    15. Malcomson, James M, 1977. "Capital Utilization and the Measurement of the Elasticity of Substitution," The Manchester School of Economic & Social Studies, University of Manchester, vol. 45(2), pages 103-11, June.
    16. Samuelson, Paul A, 1979. "Paul Douglas's Measurement of Production Functions and Marginal Productivities," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 923-39, October.
    17. Catherine J. Morrison, 1985. "Productivity Measurement with Nonstatic Expectations and Varying Capacity Utilization: An Integrated Approach," NBER Working Papers 1561, National Bureau of Economic Research, Inc.
    18. David E. Rose & Spencer Star, 1978. "Homotheticity and the Relationship between Plant Output and Factor Prices under Perfect Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 11(1), pages 92-97, February.
    19. Berndt, Ernst R & Khaled, Mohammed S, 1979. "Parametric Productivity Measurement and Choice among Flexible Functional Forms," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1220-45, December.
    20. Sosin, Kim H & Fairchild, Loretta G, 1984. "Nonhomotheticity and Technological Bias in Production," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 44-50, February.
    21. Berndt, Ernst R. & Fuss, Melvyn A., 1986. "Productivity measurement with adjustments for variations in capacity utilization and other forms of temporary equilibrium," Journal of Econometrics, Elsevier, vol. 33(1-2), pages 7-29.
    22. Gallant, A. Ronald, 1982. "Unbiased determination of production technologies," Journal of Econometrics, Elsevier, vol. 20(2), pages 285-323, November.
    23. Fare, Rolf & Jansson, Leif, 1975. "On VES and WDI Production Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(3), pages 745-50, October.
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