Assessing the effects of measurement errors on the estimation of the production function
Assessing the effects of measurement errors on the estimation of the production function
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.
scale economies, price deflators, temporary equilibrium
Universidad Carlos III de Madrid
Ornaghi, Carmine
33275e47-4642-4023-a195-39c91d0146b0
2002
Ornaghi, Carmine
33275e47-4642-4023-a195-39c91d0146b0
Ornaghi, Carmine
(2002)
Assessing the effects of measurement errors on the estimation of the production function
(Economics Series 14, 02-33)
Madrid, Spain.
Universidad Carlos III de Madrid
35pp.
Record type:
Monograph
(Working Paper)
Abstract
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.
This record has no associated files available for download.
More information
Published date: 2002
Keywords:
scale economies, price deflators, temporary equilibrium
Identifiers
Local EPrints ID: 34878
URI: http://eprints.soton.ac.uk/id/eprint/34878
PURE UUID: 37dfc07d-acba-457b-991d-9daef956303e
Catalogue record
Date deposited: 17 May 2006
Last modified: 12 Dec 2021 03:29
Export record
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics
