Assessing the effectos of measurement errors on the estimation of the production function
Carmine Ornaghi
UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de EconomÃa
Abstract:
This article explores the reasons why GMM estimators of production function parameters are generally found to produce unsatisfactory results. I attribute this finding to the inaccurate construction of the variables used in production function analysis. In particular, I suggest that the problem lies in the use of common price deflators as well as in a capital variable that does not reflect the true flow of capital services because of short-run equilibrium effects. I show that the practice of using industry-wide deflators leads to lower scale estimates, mainly due to a relevant downward bias in the labour coefficient. At the same time, it introduces a large upward bias in estimating the elasticity of output with respect to technological innovation. Moreover, a significant improvement in the estimates of capital coefficients is obtained if the information on the degree of capacity utilization is adequately exploited.
Date: 2002-02
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we023314
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