Production function estimation with unobserved input price dispersion

Paul L.E. Grieco, Shengyu Li, Hongsong Zhang

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

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 first-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.

Original languageEnglish (US)
Pages (from-to)665-690
Number of pages26
JournalInternational Economic Review
Volume57
Issue number2
DOIs
StatePublished - May 1 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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