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Correcting For Biases When Estimating Production Functions: An Illusion Of The Laws Of Algebra?

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  • Jesus Felipe
  • Rana Hasan
  • J. S. L. McCombie

Abstract

This paper argues that the true cause of the endogeneity bias that allegedly appears when estimating production functions, and which the literature has tried to deal with since the 1940s, is simply the result of omitted-variable bias due to an incorrect approximation to an accounting identity. As a result we question recent attempts to solve the problem by developing new estimators.

Suggested Citation

  • Jesus Felipe & Rana Hasan & J. S. L. McCombie, 2004. "Correcting For Biases When Estimating Production Functions: An Illusion Of The Laws Of Algebra?," CAMA Working Papers 2004-13, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2004-13
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-06/13_jesusfelipe_2004.pdf
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    References listed on IDEAS

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    1. Richard Blundell & Stephen Bond, 2000. "GMM Estimation with persistent panel data: an application to production functions," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 321-340.
    2. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-120, February.
    3. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
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    5. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 317-341.
    6. 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 923-939, October.
    7. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    8. Avi J. Cohen, 2003. "Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 199-214, Winter.
    9. Simon, Herbert A, 1979. " On Parsimonious Explanations of Production Relations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 81(4), pages 459-474.
    10. Jesus Felipe & Franklin M. Fisher, 2003. "Aggregation in Production Functions: What Applied Economists should Know," Metroeconomica, Wiley Blackwell, vol. 54(2‐3), pages 208-262, May.
    11. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
    12. Haijime Katayama & Shihua Lu & James Tybout, 2003. "Why Plant-Level Productivity Studies are Often Misleading, and an Alternative Approach to Interference," NBER Working Papers 9617, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Miaojie Yu, 2010. "Processing Trade, Firm's Productivity, and Tariff Reductions : Evidence from Chinese Products," Macroeconomics Working Papers 22799, East Asian Bureau of Economic Research.
    2. Miaojie Yu & Guangliang Ye & Baozhi Qu, 2013. "Trade Liberalisation, Product Complexity and Productivity Improvement: Evidence from Chinese Firms," The World Economy, Wiley Blackwell, vol. 36(7), pages 912-934, July.
    3. João Prates Romero, 2016. "Increasing Returns To Scale, Technological Catch-Up And Research Intensity: An Industry-Level Investigation Combining Eu Klems Productivity Data With Patent Data," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 102, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Zhenyu Zhang & Karina Schoengold, 2011. "Carbon emissions control policies in China's power generation sector," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 3(3), pages 350-368, September.
    5. Parajuli, Ranjan & Østergaard, Poul Alberg & Dalgaard, Tommy & Pokharel, Govind Raj, 2014. "Energy consumption projection of Nepal: An econometric approach," Renewable Energy, Elsevier, vol. 63(C), pages 432-444.
    6. Estola, Matti & Dannenberg, Alia, 2012. "Testing the neo-classical and the Newtonian theory of production," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6519-6527.
    7. Jesus Felipe & John S.L. McCombie, 2013. "The Aggregate Production Function and the Measurement of Technical Change," Books, Edward Elgar Publishing, number 1975.
    8. Jesus Felipe & John McCombie, 2012. "Aggregate Production Functions and the Accounting Identity Critique: Further Reflections on Temple's Criticisms and Misunderstandings," Economics Working Paper Archive wp_718, Levy Economics Institute.
    9. Yu, Bingxin & Zhu, Tingju & Breisinger, Clemens & Hai, Nguyen Manh, 2010. "Impacts of climate change on agriculture and policy options for adaptation: The case of Vietnam," IFPRI discussion papers 1015, International Food Policy Research Institute (IFPRI).
    10. Yu, Bingxin & Zhu, Tingju & Breisinger, Clemens & Manh Hai, Nguyen, 2012. "Examine the Agriculture, Poverty, and Climate Change Nexus in Vietnam," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126876, International Association of Agricultural Economists.
    11. Francisco Javier Sánchez-Vidal, 2023. "A Cautionary Note on the Use of Accounting Semi-Identity-Based Models," JRFM, MDPI, vol. 16(9), pages 1-14, August.

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