Production Function Estimation without Invertibility: Imperfectly Competitive Environments and Demand Shocks

Ulrich Doraszelski and Lixiong Li

No 20373, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We advance the proxy variable approach to production function estimation. We show that the invertibility assumption at its heart is testable. We characterize what goes wrong if invertibility fails and what can still be done. We show that rethinking how the estimation procedure is implemented either eliminates or mitigates the bias that arises if invertibility fails. In particular, a simple change to the first step of the estimation procedure provides a first-order bias correction for the GMM estimator in the second step. Furthermore, a modification of the moment condition in the second step ensures Neyman orthogonality and enhances efficiency and robustness by rendering the asymptotic distribution of the GMM estimator invariant to estimation noise from the first step.

Keywords: Production function estimation; Invertibility; Imperfect competition; Demand (search for similar items in EconPapers)
JEL-codes: D24 L10 O3 (search for similar items in EconPapers)
Date: 2025-06
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