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Production Function Estimation without Invertibility: Imperfectly Competitive Environments and Demand Shocks

Author

Listed:
  • Ulrich Doraszelski
  • Li Lixiong

Abstract

We advance the proxy variable approach to production function estimation. We show that the invertibility assumption at its heart is testable. We characterize what goes wrong if invertibility fails and what can still be done. We show that rethinking how the estimation procedure is implemented either eliminates or mitigates the bias that arises if invertibility fails. Furthermore, we show how a modification of the procedure ensures Neyman orthogonality, enhancing efficiency and robustness by rendering the asymptotic distribution of the GMM estimator in the second step of the estimation procedure invariant to estimation noise from the first step.

Suggested Citation

  • Ulrich Doraszelski & Li Lixiong, 2025. "Production Function Estimation without Invertibility: Imperfectly Competitive Environments and Demand Shocks," NBER Working Papers 33939, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33939
    Note: IO PR
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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