The Inconsistency of Common Scales Estimators when Output Prices are Unobserved and Endogenous

Tor Jakob Klette and Zvi Griliches ()
Additional contact information
Tor Jakob Klette and Zvi Griliches: Statistics Norway, http://www.ssb.no/english/research/
Authors registered in the RePEc Author Service: Zvi Griliches and Tor Jakob Klette

Discussion Papers from Research Department of Statistics Norway

Abstract: This paper explores the inconsistency of common scale estimators when output is proxied by deflated sales, based on a common output deflator across firms. The problems arise when firms operate in an imperfectly competitive environment and prices differ between firms. In particular, we show that this problem reveals itself as a downward bias in the scale estimates obtained from production function regressions, under a variety of assumptions about the pattern of technology, demand and factor price shocks. The result also holds for scale estimates obtained from cost functions. The analysis is carried one step further by adding a model of product demand. Within this augmented model we examine the probability limit of the scale estimate obtained from an ordinary production function regression. This analysis reveals that the OLS estimate will be biased towards unity - or possibly a value below unity. We have included an empirical section which illustrates the issues. The empirical analysis presents a tentative approach to avoid the problems discussed in the theoretical part of this paper.

Keywords: Scale economies; imperfect competition; econometric misspecification; price heterogeneity. (search for similar items in EconPapers)
JEL-codes: C23 D24 (search for similar items in EconPapers)
Date: 1994-10

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Engogenous (1996)
Working Paper: The Inconsistency of Common Scale Estimators when Output Prices are unobserved and Endogenous (1992)
Journal Article: The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous (1996)
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: http://EconPapers.repec.org/RePEc:ssb:dispap:127

Access Statistics for this paper

More papers in Discussion Papers from Research Department of Statistics Norway
Address: P.O.Box 8131 Dep, N-0033 Oslo, Norway
Contact information at EDIRC.
Series data maintained by B Mellemstrand ().