Production Function Estimation with Unobserved Input Price Dispersion

26 Pages Posted: 29 Apr 2016

See all articles by Paul L.E. Grieco

Paul L.E. Grieco

Pennsylvania State University - Department of Economics

Shengyu Li

Durham University

Hongsong Zhang

The University of Hong Kong

Date Written: May 2016

Abstract

We propose a method to consistently estimate production functions in the presence of input price dispersion when intermediate input quantities are not observed. We find that the traditional approach to dealing with unobserved input quantities - using deflated expenditure as a proxy - substantially biases the production estimates. In contrast, our method controls for heterogeneous input prices by exploiting the firstā€order conditions of the firm's profit maximization problem and consistently recovers the production function parameters. Using our preferred method, we provide empirical evidence of significant input price dispersion and even wider productivity dispersion than is estimated using proxy methods.

Suggested Citation

Grieco, Paul L.E. and Li, Shengyu and Zhang, Hongsong, Production Function Estimation with Unobserved Input Price Dispersion (May 2016). International Economic Review, Vol. 57, Issue 2, pp. 665-690, 2016, Available at SSRN: https://ssrn.com/abstract=2772300 or http://dx.doi.org/10.1111/iere.12172

Paul L.E. Grieco (Contact Author)

Pennsylvania State University - Department of Economics ( email )

University Park
State College, PA 16802
United States

Shengyu Li

Durham University ( email )

Old Elvet
Mill Hill Lane
Durham, Durham DH1 3HP
United Kingdom

Hongsong Zhang

The University of Hong Kong

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