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
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