Assessing the effects of measurement errors on the estimation of the production function

Ornaghi, Carmine (2002) Assessing the effects of measurement errors on the estimation of the production function. Madrid, Spain, Universidad Carlos III de Madrid, 35pp. (Economics Series 14, 02-33).


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This article explores the reasons why GMM estimators of production function parameters
are generally found to produce unsatisfactory results. I attribute this finding to the inaccurate
construction of the variables used in production function analysis. In particular, I suggest that the
problem lies in the use of common price deflators as well as in a capital variable that does not
reflect the true flow of capital services because of short-run equilibrium effects. I show that the
practice of using industry-wide deflators leads to lower scale estimates, mainly due to a relevant
downward bias in the labour coefficient. At the same time, it introduces a large upward bias in
estimating the elasticity of output with respect to technological innovation. Moreover, a
significant improvement in the estimates of capital coefficients is obtained if the information on
the degree of capacity utilization is adequately exploited

Item Type: Monograph (Working Paper)
Related URLs:
Keywords: scale economies, price deflators, temporary equilibrium
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 34878
Accepted Date and Publication Date:
Date Deposited: 17 May 2006
Last Modified: 31 Mar 2016 12:02

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