A Microeconometric Model of a Short Run Cost Function with Unobserved Heterogeneity

33 Pages Posted: 30 Jul 2008

Date Written: March 18, 2000

Abstract

Unobserved plant level heterogeneity and discrete production processes can produce problems for estimation. A structural model of discrete production decisions by heterogeneous plants is constructed and, as a case study, estimated for the U.S. Portland cement industry. A new estimator is proposed to handle the discrete production process - for which the ordered probit is a special case. Data on firm survival and exit are used to adjust all input requirement coefficients for unobserved heterogeneity. The structural model is successfully estimated. Differences between many estimated coefficients and independent estimates from external sources are statistically insignificant.

Keywords: Portland Cement, Generalized Ordered Probit, Cost Functions

JEL Classification: D24, L13, L61

Suggested Citation

Prentice, David, A Microeconometric Model of a Short Run Cost Function with Unobserved Heterogeneity (March 18, 2000). Available at SSRN: https://ssrn.com/abstract=1175922 or http://dx.doi.org/10.2139/ssrn.1175922

David Prentice (Contact Author)

Infrastructure Victoria ( email )

530 Collins St
Melbourne, 3000
Australia

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