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Using proxy variables to control for unobservables when estimating productivity: A sensitivity analysis

Author

Listed:
  • Carmine ORNAGHI

    () (University of Southampton, School of Social Science - Economics Division)

  • Ilke VAN BEVEREN

    () (Lessius, Department of Business Studies & IRES, Universite Catholique de Louvain & KU Leuven, CES & LICOS)

Abstract

The use of proxy variables to control for unobservables when estimating a production function has become increasingly popular in empirical works in recent years. The present paper aims to contribute to this literature in three important ways. First, we provide a structured review of the different estimators and their underlying assumptions. Second, we compare the results obtained using different estimators for a sample of Spanish manufacturing firms, using definitions and data comparable to those used in most empirical works. In comparing the performance of the different estimators, we rely on various proxy variables, apply different definitions of capital, use alternative moment conditions and allow for different timing assumptions of the inputs. Third, in the empirical analysis we propose a simple (non-graphical) test of the monotonicity assumption between productivity and the proxy variable. Our results suggest that productivity measures are more sensitive to the estimator choice rather than to the choice of proxy variables. Moreover, we find that the monotonicity assumption does not hold for a non-negligible proportion of the observations in our data. Importantly, results of a simple evaluation exercise where we compare productivity distributions of exporters versus non-exporters shows that different estimators yield different results, pointing to the importance of making suitable timing assumptions and choosing the appropriate estimator for the data at hand.

Suggested Citation

  • Carmine ORNAGHI & Ilke VAN BEVEREN, 2011. "Using proxy variables to control for unobservables when estimating productivity: A sensitivity analysis," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2011029, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2011029
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    Cited by:

    1. Laura ROVEGNO, 2013. "Endogenous trade restrictions and exporters’ pricing," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013023, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Laura Rovegno, 2013. "Endogenous trade restrictions and exporters’ pricing behaviour," LICOS Discussion Papers 34213, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    3. Mai T.P. Vu & Flora Bellone & Marion Dovis, 2017. "Productivity and Wage Premiums: Evidence from Vietnamese Ordinary and Processing Exporters," GREDEG Working Papers 2017-36, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    4. Michel DE VROEY, 2013. "What can civil society expect from academic macroeconomics?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

    More about this item

    Keywords

    Total factor productivity; Semiparametric estimator; Simultaneity; Timing assumptions; Generalized Method of Moments;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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