Testing the convexity hypothesis in nonparametric cost functions

Kristiaan Kerstens and Shirong Zhao

Economics Letters, 2025, vol. 247, issue C

Abstract: We develop statistical tests to formally test the convexity axiom for cost functions by extending a recently developed statistical tests in nonparametric models of production. The tests are applied to a panel of US electric power generation plants and strong evidence against convexity is found for most years in the resulting cost functions. Our results suggest that empirical researchers need to be more cautious about the often implicit embedding of the convexity assumption for the cost functions.

Keywords: Convexity; Cost function; Convex technology; Nonconvex technology (search for similar items in EconPapers)
JEL-codes: C12 D24 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176525000333

DOI: 10.1016/j.econlet.2025.112196

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