The Econometric Specification of Input Demand Systems Implied by Cost Function Representations
In the case of input demand systems based on specification of technology by a Translog cost function, it is common to estimate either a system of share equations alone, or to supplement them by the cost function. By adding up, one of the share equations is excluded. In this paper it is argued that a system of n-1 share equations is essentially incomplete, whereas if the n-1 share equations are supplemented by the cost function the implied error structure is inadmissible. Similarly, if the technology is specified by a normalized quadratic cost function, it is common to estimate either a system of n-1 demand equations alone, or to supplement them by the cost function. In both cases, the implied error structure is again inadmissible.
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Econometric Society, vol. 55(1), pages 43-68, January.
- W. Erwin Diewert & T.J. Wales, 1989. "Flexible Functional Forms and Global Curvature Conditions," NBER Technical Working Papers 0040, National Bureau of Economic Research, Inc.
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