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Robust Error Specification in a Production System

  • Rulon D. Pope
  • Jeffrey LaFrance

Economists who estimate demand or supply systems are often faced with the issue of whether to estimate with shares or quantities as the dependent variables. This paper reviews the implications of making the wrong choice in the context of normalized profit functions of competitive behavior. The implication is that inconsistent estimates are obtained if one makes the wrong choice. A robust structure is proposed which nests these forms (shares or quantities) in a general system and that allows the data to suggest which form is preferable. An application to the U.S. agricultural sector follows. Our results suggest that shares and quantities are rejected in favor of an alternative functional form.

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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 17-12.

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Length: 29 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mos:moswps:2012-17
Contact details of provider: Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
Fax: +61-3-9905-5476
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  1. Thompson, Gary D., 1988. "Choice Of Flexible Functional Forms: Review And Appraisal," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 13(02), December.
  2. Brown, Bryan W. & Walker, Mary Beth, 1995. "Stochastic specification in random production models of cost-minimizing firms," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 175-205.
  3. Amemiya, Takeshi & Powell, James L., 1981. "A comparison of the Box-Cox maximum likelihood estimator and the non-linear two-stage least squares estimator," Journal of Econometrics, Elsevier, vol. 17(3), pages 351-381, December.
  4. David Aadland & DeeVon Bailey, 2001. "Short-Run Supply Responses in the U.S. Beef-Cattle Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 826-839.
  5. Bryan W. Brown & Mary Beth Walker, 1992. "Stochastic specification in random production models of cost minimizing firms," FRB Atlanta Working Paper 92-6, Federal Reserve Bank of Atlanta.
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