Estimating Production Functions Using Inputs to Control for Unobservables

James Levinsohn and Amil Petrin

No 7819, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce a new method for conditioning out serially correlated unobserved shocks to the production technology by building ideas first developed in Olley and Pakes (1996). Olley and Pakes show how to use investment to control for correlation between input levels and the unobserved firm-specific productivity process. We prove that like investment, intermediate inputs (those inputs which are typically subtracted out in a value-added production function) can also solve this simultaneity problem. We highlight three potential advantages to using an intermediate inputs approach relative to investment. Our results indicate that these advantages are empirically important.

Date: 2000-08
New Economics Papers: this item is included in nep-agr, nep-eff and nep-ind
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Published as Levinsohn, James and Amil Petrin. "Estimating Production Functions Using Inputs To Control For Unobservables," Review of Economic Studies, 2003, v70(2,Apr), 317-341.

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