Imposing and Testing Curvature Conditions on a Box-Cox Cost Function

40 Pages Posted: 9 Nov 2003

See all articles by Bertrand M. Koebel

Bertrand M. Koebel

University College London - Department of Economics; Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration; IZA Institute of Labor Economics

Martin Falk

ZEW – Leibniz Centre for European Economic Research

Francois Laisney

ZEW – Leibniz Centre for European Economic Research

Date Written: 2000

Abstract

We present a new method for imposing and testing concavity of a cost function using asymptotic least squares, which can easily be implemented even for cost functions which are nonlinear in parameters. We provide an illustration on the basis of a (generalized) Box-Cox cost function with six inputs: Capital, labor disaggregated in three skill levels, energy, and intermediate materials. A parametric test of the concavity of the cost function in prices is presented, and price elasticities are compared when curvature conditions are imposed and when they are not. The results show that, although concavity is statistically rejected, the estimates are not very sensitive to its imposition. We find that substitution is stronger between the different types of labor than between any other pair of inputs.

Keywords: input demands, concavity, inequality restrictions, Box-Cox

JEL Classification: C33, E23, J21, J31

Suggested Citation

Koebel, Bertrand M. and Falk, Martin and Laisney, Francois, Imposing and Testing Curvature Conditions on a Box-Cox Cost Function (2000). Available at SSRN: https://ssrn.com/abstract=374762 or http://dx.doi.org/10.2139/ssrn.374762

Bertrand M. Koebel

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration ( email )

P.O. Box 4120
39106 Magdeburg
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Martin Falk (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany

Francois Laisney

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany