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Using Proxy Variables to Control for Unobservables When Estimating Productivity: A Sensitivity Analysis

46 Pages Posted: 14 Jan 2012  

Carmine Ornaghi

University of Southampton - Division of Economics

Ilke Van Beveren

KULeuven, Department of Economics; KULeuven, CES; UCL, Department of Economics, IRES

Date Written: July 18, 2011

Abstract

The use of proxy variables to control for unobservables when estimating a production function has become increasingly popular in empirical works in recent years. The present paper aims to contribute to this literature in three important ways. First, we provide a structured review of the different estimators and their underlying assumptions. Second, we compare the results obtained using different estimators for a sample of Spanish manufacturing firms, using definitions and data comparable to those used in most empirical works. In comparing the performance of the different estimators, we rely on various proxy variables, apply different definitions of capital, use alternative moment conditions and allow for different timing assumptions of the inputs. Third, in the empirical analysis we propose a simple (non-graphical) test of the monotonicity assumption between productivity and the proxy variable. Our results suggest that productivity measures are more sensitive to the estimator choice rather than to the choice of proxy variables. Moreover, we find that the monotonicity assumption does not hold for a non-negligible proportion of the observations in our data. Importantly, results of a simple evaluation exercise where we compare productivity distributions of exporters versus non-exporters shows that different estimators yield different results, pointing to the importance of making suitable timing assumptions and choosing the appropriate estimator for the data at hand.

Keywords: total factor productivity, semiparametric estimator, simultaneity, timing assumptions, generalized method of moments

JEL Classification: C13, C14, D24, D40

Suggested Citation

Ornaghi, Carmine and Van Beveren, Ilke, Using Proxy Variables to Control for Unobservables When Estimating Productivity: A Sensitivity Analysis (July 18, 2011). Available at SSRN: https://ssrn.com/abstract=1984573 or http://dx.doi.org/10.2139/ssrn.1984573

Carmine Ornaghi (Contact Author)

University of Southampton - Division of Economics ( email )

Southampton, SO17 1BJ
United Kingdom

Ilke Van Beveren

KULeuven, Department of Economics ( email )

Leuven, B-3000
Belgium

HOME PAGE: http://econ.kuleuven.be/eng/fetew/medewerker/Userpage.aspx?PID=1318

KULeuven, CES ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://econ.kuleuven.be/eng/fetew/medewerker/Userpage.aspx?PID=1318

UCL, Department of Economics, IRES ( email )

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

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