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The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation

  • Kamil Galuscak
  • Lubomir Lizal

Based on a large panel of Czech manufacturing firms, we estimate firm-level production functions in 2003-2007 using the Levinsohn and Petrin (2003) and Wooldridge (2009) approaches, correcting for the measurement error in capital. We show that measurement error plays a significant role in the size of the estimated capital coefficient. The capital coefficient estimate approximately doubles (depending on the particular industry) when we control for capital measurement error. Consequently, while the majority of industries exhibit constant or (in)significantly decreasing returns to scale when the standard methods are used, increasing returns cannot be rejected in some industries when the estimation is corrected for capital measurement error.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2011/09.

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Date of creation: Nov 2011
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Handle: RePEc:cnb:wpaper:2011/09
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  1. Kamil Galuscak & Daniel Munich, 2005. "Structural and Cyclical Unemployment: What Can We Derive from the Matching Function?," Working Papers 2005/02, Czech National Bank, Research Department.
  2. Rumen Dobrinsky & Gabor Korosi & Nikolay Markov & Laszlo Halpern, 2004. "Firms’ Price Markups and Returns to Scale in Imperfect Markets - Bulgaria and Hungary," IEHAS Discussion Papers 0412, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Dietrich Earnhart & Lubomir Lizal, 2006. "Pollution, Production, and Sectoral Differences in a Transition Economy," Comparative Economic Studies, Palgrave Macmillan, vol. 48(4), pages 662-681, December.
  4. Ackerberg, Daniel & Caves, Kevin & Frazer, Garth, 2006. "Structural identification of production functions," MPRA Paper 38349, University Library of Munich, Germany.
  5. Kamil Dybczak & Vladislav Flek & Dana Hajkova & Jaromir Hurnik, 2006. "Supply-Side Performance and Structure in the Czech Republic (1995-2005)," Working Papers 2006/4, Czech National Bank, Research Department.
  6. Adam Gersl & Ieva Rubene & Tina Zumer, 2007. "Foreign Direct Investment and Productivity Spillovers: Updated Evidence from Central and Eastern Europe," Working Papers 2007/8, Czech National Bank, Research Department.
  7. Gábor Kátay & Zoltán Wolf, 2008. "Driving Factors of Growth in Hungary - a Decomposition Exercise," MNB Working Papers 2008/6, Magyar Nemzeti Bank (the central bank of Hungary).
  8. Carmine Ornaghi, 2006. "Assessing the effects of measurement errors on the estimation of production functions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 879-891.
  9. Dietrich Earnhart & Lubomir Lizal, 2010. "Pollution Control in a Transition Economy: Do Firms Face Economies and/or Diseconomies of Scale?," CERGE-EI Working Papers wp405, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  10. Vladislav Flek & Mojmír Hájek & Jaromír Hurník & Ladislav Prokop & Lenka Racková, 2001. "Supply-side performance and structure," Politická ekonomie, University of Economics, Prague, vol. 2001(6).
  11. Dana Hajkova, 2008. "The Measurement of Capital Services in the Czech Republic," Working Papers 2008/11, Czech National Bank, Research Department.
  12. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc.
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