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Nonparametric identification of unobserved technological heterogeneity in production

Author

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  • Laurens Cherchye

    () (Department of economics, University of Leuven. E. Sabbelaan 53, 8500 Kortrijk, Belgium)

  • Thomas Demuynck

    () (ECARES, Université Libre de Bruxelles. avenue F. D. Roosevelt 50, CP 114, 1050 Brussels, Belgium)

  • Bram De Rock

    () (ECARES, Université Libre de Bruxelles. avenue F. D. Roosevelt 50, CP 114, 1050 Brussels, Belgium)

  • Marijn Verschelde

    () (Department of Economics and Quantitative Methods, IÉSEG School of Management, LEM (UMR-CNRS 9221), and Department of Economics, KULeuven)

Abstract

We propose a novel nonparametric method for the structural identification of unobserved technological heterogeneity in production. We assume cost minimization as the firms' behavioral objective, and we model unobserved heterogeneity as an unobserved productivity factor on which firms condition the input demand of the observed inputs. Our model of unobserved technological differences can equivalently be represented in terms of unobserved\latent capital" that guarantees data consistency with our behavioral assumption, and we argue that this avoids a simultaneity bias in a natural way. Our empirical application to Belgian manufacturing data shows that our method allows for drawing strong and robust conclusions, despite its nonparametric orientation. For example, our results pinpoint a clear link between international exposure and technological heterogeneity and show that primary inputs are in the considered sectors substituted for materials rather than for technology.

Suggested Citation

  • Laurens Cherchye & Thomas Demuynck & Bram De Rock & Marijn Verschelde, 2018. "Nonparametric identification of unobserved technological heterogeneity in production," Working Paper Research 335, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201802-335
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    More about this item

    Keywords

    production behavior; unobserved heterogeneity; cost minimization; nonparametric identification; simultaneity bias; latent capital; manufacturing;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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