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Capital Stock Approximation using Firm Level Panel Data: A Modified Perpetual Inventory Approach

Steffen Mueller

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2008, vol. 228, issue 4, 357-371

Abstract: Many recent studies exploring conditional factor demand or factor substitution issues use firm level panel data. A considerable number of establishment panels contains no direct information on the capital input, necessary for production or cost function estimation. Incorrect measurement of capital leads to biased estimates and casts doubt on any inference on output elasticities or input substitution properties. The perpetual inventory approach, commonly used for long panels, is a method that attenuates these problems. In this paper a modified perpetual inventory approach is proposed. This method provides more reliable measures for capital input when short firm panels are used and no direct information on capital input is available. The empirical results based on a replication study of Addison et al. (2006) support the conclusion that modified perpetual inventory is superior to previous attempts in particular when fixed effects estimation techniques are used.

Keywords: Production function; capital input (search for similar items in EconPapers)
Date: 2008
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