A System Approach to Structural Identification of Production Functions with Multi-Dimensional Productivity

Emir Malikov, Shunan Zhao and Jingfang Zhang

A chapter in Essays in Honor of Subal Kumbhakar, 2024, vol. 46, pp 211-263 from Emerald Group Publishing Limited

Abstract: There is growing empirical evidence that firm heterogeneity is technologically non-neutral. This chapter extends the Gandhi, Navarro, and Rivers (2020) proxy variable framework for structurally identifying production functions to a more general case when latent firm productivity is multi-dimensional, with both factor-neutral and (biased) factor-augmenting components. Unlike alternative methodologies, the proposed model can be identified under weaker data requirements, notably, without relying on the typically unavailable cross-sectional variation in input prices for instrumentation. When markets are perfectly competitive, point identification is achieved by leveraging the information contained in static optimality conditions, effectively adopting a system-of-equations approach. It is also shown how one can partially identify the non-neutral production technology in the traditional proxy variable framework when firms have market power.

Keywords: Production function; factor-augmenting technology; proxy variable; productivity; structural identification; endogeneity; D24; L10 (search for similar items in EconPapers)
Date: 2024
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Working Paper: A System Approach to Structural Identification of Production Functions with Multi-Dimensional Productivity (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320240000046009

DOI: 10.1108/S0731-905320240000046009

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