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Estimating Production Functions When Productivity Change is Endogenous

  • Marc-Andreas Muendler

Production function estimation with micro-data shows that a persistent unobserved variable varies within firm or plant over time but resists treatment and may cause biases. This paper presents an estimation model of the firm under endogenous productivity change. The model implies that (i) the so-far untreated effect stems from firms' planned efficiency responses to the competitive environment and that (ii) a suit-able proxy to productivity is investment interacted with a sector-level competition variable. An application to Brazilian manufacturing firm data shows that this proxy and multivariate extensions yield coefficient estimates with considerably less noise in bootstraps than alternative proxies, while reducing the difference to fixed-effects estimation and remedying commonly suspected biases. Whereas productivity change is measured consistently, scale economies are not identified when productivity and price are endogenous.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2004/wp-cesifo-2004-03/cesifo1_wp1143.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1143.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1143
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  1. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
  2. Simeon Djankov & Bernard Hoekman, 2000. "Market discipline and corporate efficiency: evidence from Bulgaria," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 190-212, February.
  3. Levinsohn, James, 1993. "Testing the imports-as-market-discipline hypothesis," Journal of International Economics, Elsevier, vol. 35(1-2), pages 1-22, August.
  4. Z, Griliches & Jacques Mairesse, 1997. "Production Functions : The Search for Identification," Working Papers 97-30, Centre de Recherche en Economie et Statistique.
  5. Tor Jakob Klette & Zvi Griliches, 1992. "The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Engogenous," NBER Working Papers 4026, National Bureau of Economic Research, Inc.
  6. Richard Blundell & Steve Bond, 1999. "GMM estimation with persistent panel data: an application to production functions," IFS Working Papers W99/04, Institute for Fiscal Studies.
  7. Benjamin E. Hermalin., 1991. "The Effects of Competition on Executive Behavior," Economics Working Papers 91-182, University of California at Berkeley.
  8. repec:ner:tilbur:urn:nbn:nl:ui:12-84400 is not listed on IDEAS
  9. Tybout, James & de Melo, Jamie & Corbo, Vittorio, 1991. "The effects of trade reforms on scale and technical efficiency : New evidence from Chile," Journal of International Economics, Elsevier, vol. 31(3-4), pages 231-250, November.
  10. George S Olley & Ariel Pakes, 1992. "The Dynamics Of Productivity In The Telecommunications Equipment Industry," Working Papers 92-2, Center for Economic Studies, U.S. Census Bureau.
  11. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  12. Harrison, Ann E., 1994. "Productivity, imperfect competition and trade reform : Theory and evidence," Journal of International Economics, Elsevier, vol. 36(1-2), pages 53-73, February.
  13. Marc-Andreas Muendler, 2004. "Trade, Technology, and Productivity: A Study of Brazilian Manufacturers, 1986-1998," CESifo Working Paper Series 1148, CESifo Group Munich.
  14. Tybout, James R. & Westbrook, M. Daniel, 1995. "Trade liberalization and the dimensions of efficiency change in Mexican manufacturing industries," Journal of International Economics, Elsevier, vol. 39(1-2), pages 53-78, August.
  15. Pedro Cavalcanti Ferreira & JosÈ Luiz Rossi, 2003. "New Evidence from Brazil on Trade Liberalization and Productivity Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1383-1405, November.
  16. Mirta N.S. Bugarin & Roberto Ellery Jr & Victor Gomes & Arilton Teixeira, 2002. "The Brazilian Depression in the 1980s and 1990s," Computing in Economics and Finance 2002 338, Society for Computational Economics.
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