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Nonparametric Production Analysis with Unobserved Heterogeneity in Productivity

Author

Listed:
  • Laurens Cherchye
  • Thomas Demuynck
  • Bram De Rock
  • Marijn Verschelde

Abstract

We propose a novel nonparametric method for the structural production analysis in the presence of unobserved heterogeneity in productivity. We assume cost minimization as the firms' behavioral objective, and we model productivity on which firms condition the input demand of the observed inputs. Our model can equivalently be represented in terms of endogenously chosen latent input costs that guarantee data consistency with our behavioral assumption, and we argue that this avoids a simultaneity bias in a natural way. Our Monte Carlo simulation and empirical application to Belgian manufacturing data show that our method allows for drawing strong and robust conclusions, despite its nonparametric orientation. For example, our results pinpoint a clear link between international exposure and productivity and show that primary inputs are substituted for materials rather than for productivity enhancement.

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock & Marijn Verschelde, 2018. "Nonparametric Production Analysis with Unobserved Heterogeneity in Productivity," Working Papers ECARES 2018-25, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/277180
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    References listed on IDEAS

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    Cited by:

    1. Laurens Cherchye & Bram De Rock & Annalisa Ferrando & Klaas Mulier & Marijn Verschelde, 2020. "Identifying Financial Constraints," Working Papers ECARES 2020-04, ULB -- Universite Libre de Bruxelles.
    2. Aguiar, Victor H. & Hjertstrand, Per & Serrano, Roberto, 2020. "A Rationalization of the Weak Axiom of Revealed Preference," Working Paper Series 1321, Research Institute of Industrial Economics.
    3. Laurens Cherchye & Bram De Rock & Annalisa Ferrando & Klaas Mulier & Marijn Verschelde, 2018. "Identifying Financial Constraints from Production Data," Working Papers ECARES 2018-31, ULB -- Universite Libre de Bruxelles.

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    Keywords

    productivity; unobserved heterogeneity; simultaneity bias; nonparametric pro- duction analysis; cost minimisation; manufacturing;

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