Robust Production Function Estimation when there is Market Power

Jordi Jaumandreu

No 19677, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The production function is an engineering relationship, but recent estimators use firm’s optimal choices that depend on market power. Researchers often become puzzled: the estimator dynamic panel (DP), which is robust to market power because it does not use any FOC, often produces unsatisfactory outcomes; the estimators known as OP/LP, which are deemed inconsistent in the presence of market power, typically improve. We prove that the coincidence of DP and OP/LP, except by sampling error, is a necessary condition for consistency, and show how the improvements relate to the production function specification. We derive a novel estimator, robust to arbitrary forms of market power, based on a version of OP/LP that proxies for MC. Using this estimator, we propose a test for market power and a test for the specification, the latter based on the smaller set of assumptions used by DP.

Keywords: market; power (search for similar items in EconPapers)
Date: 2024-11
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