Using proxy variables to control for unobservables when estimating productivity: A sensitivity analysis

Carmine Ornaghi and Ilke Van Beveren

No 2011029, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: The use of proxy variables to control for unobservables when estimating a production function has become increasingly popular in empirical works in recent years. The present paper aims to contribute to this literature in three important ways. First, we provide a structured review of the different estimators and their underlying assumptions. Second, we compare the results obtained using different estimators for a sample of Spanish manufacturing firms, using definitions and data comparable to those used in most empirical works. In comparing the performance of the different estimators, we rely on various proxy variables, apply different definitions of capital, use alternative moment conditions and allow for different timing assumptions of the inputs. Third, in the empirical analysis we propose a simple (non-graphical) test of the monotonicity assumption between productivity and the proxy variable. Our results suggest that productivity measures are more sensitive to the estimator choice rather than to the choice of proxy variables. Moreover, we find that the monotonicity assumption does not hold for a non-negligible proportion of the observations in our data. Importantly, results of a simple evaluation exercise where we compare productivity distributions of exporters versus non-exporters shows that different estimators yield different results, pointing to the importance of making suitable timing assumptions and choosing the appropriate estimator for the data at hand.

Keywords: Total factor productivity; Semiparametric estimator; Simultaneity; Timing assumptions; Generalized Method of Moments (search for similar items in EconPapers)
JEL-codes: C13 C14 D24 D40 (search for similar items in EconPapers)
Pages: 45
Date: 2011-08-19
New Economics Papers: this item is included in nep-bec and nep-eff
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2011029

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