On the Identification of Production Functions: How Heterogeneous is Productivity?

Amit Gandhi, Salvador Navarro and David Rivers
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Amit Gandhi: University of Wisconsin-Madison, https://econ.wisc.edu/

No 20119, University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers from University of Western Ontario, Centre for Human Capital and Productivity (CHCP)

Abstract: The estimation of production functions suffers from an unresolved identification problem caused by flexible inputs, such as intermediate inputs. We develop an identification strategy for production functions based on a transformation of the firm’s short-run first order condition that solves the problem for both gross output and value-added production functions. We apply our approach to plant-level data from Colombia and Chile, and find that a gross output production function implies fundamentally different patterns of productivity heterogeneity than a value-added specification. This finding is consistent with our analysis of the bias induced by the use of value-added.

Date: 2011
New Economics Papers: this item is included in nep-agr and nep-eff
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Working Paper: On the Identification of Production Functions: How Heterogeneous is Productivity? (2012)
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