How Reliable is Duality Theory in Empirical Work?

Juan Rosas () and Sergio Lence

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The Neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology. This relationship, commonly referred to as duality theory, has been widely used in empirical work to estimate production parameters, such as elasticities and returns to scale, without the requirement of explicitly specifying the parametric form of the production function. We generate a pseudo-dataset by Monte Carlo simulations, which starting from known production parameters, yield a dataset with the main characteristics of U.S. agriculture in terms of unobserved firm heterogeneity, decisions under uncertainty, unexpected production and price shocks, endogenous prices, output and input aggregation, measurement error in variables, and omitted variables. Production parameters are not precisely recovered when performing econometric estimation based on the duality approach, and the elasticity estimates are inaccurate. Deviations of own- and cross-price elasticities from initial median values, given our parameter calibration, range between 6% and 229%, with an average of 71%. Also, own-price elasticities are as imprecisely recovered as cross- price elasticities. Sensitivity analysis shows that results still hold for different sources and levels of noise, as well as sample size used in estimation.

Date: 2019-04-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://dr.lib.iastate.edu/server/api/core/bitstre ... 5833ad52e801/content
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Journal Article: How Reliable is Duality Theory in Empirical Work? (2019)
Working Paper: How Reliable is Duality Theory in Empirical Work? (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:isu:genstf:201904010700001698

Access Statistics for this paper

More papers in ISU General Staff Papers from Iowa State University, Department of Economics Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070. Contact information at EDIRC.
Bibliographic data for series maintained by Curtis Balmer ().