Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments

Nicolás de Roux, Marcela Eslava, Santiago Franco () and Eric Verhoogen
Additional contact information
Santiago Franco: University of Chicago

No 14006, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper develops a new method for estimating production-function parameters that can be applied in differentiated-product industries with endogenous quality and variety choice. We take advantage of data on physical quantities of outputs and inputs from the Colombian manufacturing survey, focusing on producers of rubber and plastic products. Assuming constant elasticities of substitution of outputs and inputs within firms, we aggregate from the firm-product to the firm level and show how quality and variety choices may bias standard estimators. Using real exchange rates and variation in the "bite" of the national minimum wage, we construct external instruments for materials and labor choices. We implement a simple two-step instrumental-variables method, first estimating a difference equation to recover the materials and labor coefficients and then estimating a levels equation to recover the capital coefficient. Under the assumption that the instruments are uncorrelated with firms' quality and variety choices, this method yields consistent estimates, free of the quality and variety biases we have identified. Our point estimates differ from those of existing methods and changes in our preferred productivity estimator perform relatively well in predicting future export growth.

Keywords: production-function estimation; quality; variety; external instruments (search for similar items in EconPapers)
JEL-codes: D24 L1 L65 O14 (search for similar items in EconPapers)
Pages: 93 pages
Date: 2020-12
New Economics Papers: this item is included in nep-eff and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://docs.iza.org/dp14006.pdf (application/pdf)

Related works:
Working Paper: Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments (2021)
Working Paper: Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments (2021)
Working Paper: Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp14006

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().