Aggregation Over Firms and Flexible Functional Forms

H. Youn Kim

The Economic Record, 2005, vol. 81, issue 252, 19-29

Abstract: The present paper presents a generalised class of cost functions suitable for aggregation of firms and considers various flexible functional forms to assess whether they possess desirable aggregation properties. This set of cost functions includes two output functions and subsumes linear and non‐linear cost functions employed in existing analyses. While the quadratic and the generalised Leontief and McFadden cost functions satisfy the generalised aggregation condition, the translog cost function and its variants are less capable of possessing desirable aggregation properties. A modified quasi‐homothetic translog form is presented that is useful for aggregate analysis. Possible extensions of the generalised aggregation rule are discussed.

Date: 2005
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