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Estimating complex production functions: The importance of starting values

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  • Mark Neal

    () (Risk and Sustainable Management Group, University of Queensland)

Abstract

Production functions that take into account uncertainty can be empirically estimated by taking a state contingent view of the world. Where there is no a priori information to allocate data amongst a small number of states, the estimation may be carried out with finite mixtures model. The complexity of the estimation almost guarantees a large number of local maxima for the likelihood function. However, it is shown, with examples, that a variation on the traditional method of finding starting values substantially improves the estimation results. One of the major benefits of the proposed method is the reliable estimation of a decision makerâs ability to substitute output between states, justifying a preference for the state contingent approach over the use of a stochastic production function.

Suggested Citation

  • Mark Neal, 2007. "Estimating complex production functions: The importance of starting values," Risk & Uncertainty Working Papers WP1R07, Risk and Sustainable Management Group, University of Queensland.
  • Handle: RePEc:rsm:riskun:r07_1
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    File URL: http://www.uq.edu.au/rsmg/WP/WPR07_1.pdf
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    Keywords

    Production function; econometrics; starting values; state contingent production;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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