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A NOte on the Importance of Testing for Regularities for Estimated Flexible Functional Forms

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  • Salvanes, K.G.
  • Tjotta, S.

Abstract

In empirical productivity analysis it has become customary to use flexible functional forms to represent a firm's production technology by estimating cost functions. In this note we suggest a procedure to calculate the region where an estimated translog cost function meet the required regularities (positive cost, positive marginal cost, homogeneous, monotonicity and concavity in input prices). We calculate this region for the US Bell cost function as reported by Evans and Heckman (1984, 1986), and show that the estimated cost function had negative marginal cost in most of the test region.

Suggested Citation

  • Salvanes, K.G. & Tjotta, S., 1998. "A NOte on the Importance of Testing for Regularities for Estimated Flexible Functional Forms," Norway; Department of Economics, University of Bergen 177, Department of Economics, University of Bergen.
  • Handle: RePEc:fth:bereco:177
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    1. Ying, John S & Shin, Richard T, 1993. "Costly Gains to Breaking Up: LECs and the Baby Bells," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 357-361, May.
    2. Evans, David S & Heckman, James J, 1986. "A Test for Subadditivity of the Cost Function with an Application to the Bell System: Erratum," American Economic Review, American Economic Association, vol. 76(4), pages 856-858, September.
    3. Evans, David S & Heckman, James J, 1984. "A Test for Subadditivity of the Cost Function with an Application to the Bell System," American Economic Review, American Economic Association, vol. 74(4), pages 615-623, September.
    4. Wales, Terence J., 1977. "On the flexibility of flexible functional forms : An empirical approach," Journal of Econometrics, Elsevier, vol. 5(2), pages 183-193, March.
    5. Richard T. Shin & John S. Ying, 1992. "Unnatural Monopolies in Local Telephone," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 171-183, Summer.
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    Cited by:

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    2. Hendrik Wolff & Thomas Heckelei & Ron Mittelhammer, 2010. "Imposing Curvature and Monotonicity on Flexible Functional Forms: An Efficient Regional Approach," Computational Economics, Springer;Society for Computational Economics, vol. 36(4), pages 309-339, December.
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    5. Lucinda, Claudio Ribeiro & Anuatti, Francisco, 2017. "Economies of Scale and Scope in the Sanitation Sector," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 37(2), November.
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    More about this item

    Keywords

    PRODUCTIVITY ; COSTS ; TESTING;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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