The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation

24 Pages Posted: 30 Jan 2012

See all articles by Lubomir Lizal

Lubomir Lizal

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute); Czech National Bank (CNB)

Kamil Galuscak

Czech National Bank

Date Written: January 27, 2012

Abstract

Based on a large panel of Czech manufacturing firms, we estimate firm-level production functions in 2003-2007 using the Levinsohn and Petrin (2003) and Wooldridge (2009) approaches, correcting for the measurement error in capital. We show that measurement error plays a significant role in the size of the estimated capital coefficient. The capital coefficient estimate approximately doubles (depending on the particular industry) when we control for capital measurement error. Consequently, while the majority of industries exhibit constant or (in)significantly decreasing returns to scale when the standard methods are used, increasing returns cannot be rejected in some industries when the estimation is corrected for capital measurement error.

Keywords: Measurement error, capital, firm-level data, Czech Republic

JEL Classification: C23, C33, D24, O47

Suggested Citation

Lizal, Lubomir and Galuscak, Kamil, The Impact of Capital Measurement Error Correction on Firm-Level Production Function Estimation (January 27, 2012). William Davidson Institute Working Paper No. 1026. Available at SSRN: https://ssrn.com/abstract=1993285 or http://dx.doi.org/10.2139/ssrn.1993285

Lubomir Lizal (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
+420 2 2400 5114 (Phone)
+420 2 2422 7143 (Fax)

HOME PAGE: http://www.cerge-ei.cz

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Kamil Galuscak

Czech National Bank ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

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