MICROPRODUCTION FUNCTIONS WITH UNIQUE COEFFICIENTS AND ERRORS: A RECONSIDERATION AND RESPECIFICATION

P.A.V.B. Swamy, George Tavlas and Stephen Hall

Macroeconomic Dynamics, 2015, vol. 19, issue 2, 311-333

Abstract: Estimated microproduction functions confront two major problems—those of (1) unknown functional forms and (2) the measurement of capital independent of the distribution of output among the factors of production. The latter problem has emerged unresolved from the earlier Cambridge capital controversy. In the presence of these two problems, all specifications of microproduction functions have involved nonunique coefficients and error terms. We provide a method of deriving time-varying coefficients that produces unique coefficients and error terms. Specifically, we respecify the microproduction function in such a way that its coefficients are the sums of (i) the appropriate partial derivatives and (ii) exact representations of excluded-variable biases. By decomposing the total coefficients, we obtain the unique coefficients and a unique error term. Our treatment of heterogeneous capital is not subject to the criticisms of that concept that emerged during the Cambridge controversy.

Date: 2015
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