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Estimation of Technical Change and Price Elasticities: A Categorical Time-varying Coefficient Approach

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  • Guohua Feng
  • Jiti Gao
  • Xiaohui Zhang

Abstract

In this paper we outline new procedure for estimating technical change and price elasticities. Specifically, we propose a categorical time-varying coefficient translog cost function, where each coefficient is expressed as a nonparametric function of a categorical time variable, thereby allowing each time period to have its own set of coefficients. Our application to U.S. electricity firms reveals that compared with the traditional time trend representation of technical change that has remained a cornerstone of the productivity literature, this model offers two advantages: (1) it is capable of producing estimates of productivity growth that closely track those obtained using the Tornqvist approximation to the Divisia index; and (2) it can solve a well-known problem commonly referred to as "the problem of trending elasticities", i.e. estimated price elasticities show little temporal variation even when in fact they do.

Suggested Citation

  • Guohua Feng & Jiti Gao & Xiaohui Zhang, 2016. "Estimation of Technical Change and Price Elasticities: A Categorical Time-varying Coefficient Approach," Monash Econometrics and Business Statistics Working Papers 2/16, Monash University, Department of Econometrics and Business Statistics.
  • Handle: RePEc:msh:ebswps:2016-2
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    More about this item

    Keywords

    semiparametric method; categorical time-varying coefficient model; technical change and productivity;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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