Estimating Production Functions with Heterogeneous Firms
We present a new approach to the estimation of production functions that allows for richer patterns of firm heterogeneity than can be accommodated under the proxy variable methods of and Olley/Pakes and Levinsohn/Petrin. In particular, we show that the economics of the firms static input choice contains the necessary identifying information to control for the endogeneity problem in the production function. From an econometric point of view, our estimation proceeds in a single GMM step, and thus standard asymptotic standard errors are available. We consider the identification and estimation of models with heterogeneity in both input and output prices, as well as heterogeneity in factor specific productivity. Our empirical results show that we control for more of the endogeneity problem than the proxy variable approach, resulting in estimates of labor productivity nearly half as small.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/society.htm
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- Stephen Bond & Måns Söderbom, 2005.
"Adjustment Costs and the Identification of Cobb Douglas Production Functions,"
2005-W04, Economics Group, Nuffield College, University of Oxford.
- Steve Bond & Måns Söderbom, 2005. "Adjustment costs and the identification of Cobb Douglas production functions," IFS Working Papers W05/04, Institute for Fiscal Studies.
- George S Olley & Ariel Pakes, 1992.
"The Dynamics Of Productivity In The Telecommunications Equipment Industry,"
92-2, Center for Economic Studies, U.S. Census Bureau.
- Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November.
- G. Steven Olley & Ariel Pakes, 1992. "The Dynamics of Productivity in the Telecommunications Equipment Industry," NBER Working Papers 3977, National Bureau of Economic Research, Inc.
- Fox, Jeremy T. & Smeets, Valérie, 2007. "Do Input Quality and Structural Productivity Estimates Drive Measured Differences in Firm Productivity?," Working Papers 07-2, University of Aarhus, Aarhus School of Business, Department of Economics.
- Stephen Bond & MÃƒÂ¥ns SÃƒÂ¶derbom, 2005. "Adjustment Costs and the Identification of Cobb Douglas Production Functions," Economics Series Working Papers 2005-W04, University of Oxford, Department of Economics.
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