The Econometric Specification of Input Demand Systems Implied by Cost Function Representations

Keith McLaren and Xueyan Zhao

No 3/09, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: In the case of input demand systems based on specification of technology by a Translog cost function, it is common to estimate either a system of share equations alone, or to supplement them by the cost function. By adding up, one of the share equations is excluded. In this paper it is argued that a system of n-1 share equations is essentially incomplete, whereas if the n-1 share equations are supplemented by the cost function the implied error structure is inadmissible. Similarly, if the technology is specified by a normalized quadratic cost function, it is common to estimate either a system of n-1 demand equations alone, or to supplement them by the cost function. In both cases, the implied error structure is again inadmissible.

Keywords: Cost Function; Input demands; Share equations; Translog; Normalized Quadratic; Error specification. (search for similar items in EconPapers)
JEL-codes: C30 D24 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2009-04
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (3)

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