Estimating firm-level production functions with spatial dependence

Pao-li Chang (), Ryo Makioka, Bo Lin Ng () and Zhenlin Yang ()
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Pao-li Chang: School of Economics, Singapore Management University
Bo Lin Ng: School of Economics, Singapore Management University
Zhenlin Yang: School of Economics, Singapore Management University

No 10-2024, Economics and Statistics Working Papers from Singapore Management University, School of Economics

Abstract: This paper proposes a three-stage efficient GMM estimation algorithm for estimating firm-level production functions given spatial dependence across firms due to supplier-customer relationships, sharing of input markets, or knowledge spillover. The procedure builds on Ackerberg, Caves and Frazer (2015) and Wooldridge (2009), but in addition, allows the productivity process to depend on the lagged output levels and lagged input usages of related firms, and spatially correlated productivity shocks across firms, where the set of related firms can differ across the three dimensions of spatial dependence. We establish the asymptotic properties of the proposed estimator, and conduct Monte Carlo simulations to validate these properties. The proposed estimator is consistent under DGPs with or without spatial dependence, and with strong/weak or positive/negative spatial dependence. In contrast, the conventional estimators lead to biased estimates of the production function parameters if the underlying DGPs have spatial dependence structure, and the magnitudes of the bias increase with the strength of spatial dependence in the underlying DGPs. We apply the proposed estimation algorithm to a Japanese firm-to-firm dataset of 14,178 firms during the period 2009–2018. We find significant and positive spatial coefficients in the Japanese firm-level productivity process via all three channels proposed above.

Keywords: productivity estimation; spatial dependence; supplier-customer network; factor market pooling; knowledge spillover (search for similar items in EconPapers)
JEL-codes: C31 D24 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2024-10-15
New Economics Papers: this item is included in nep-bec, nep-eff, nep-net, nep-sea and nep-ure
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