Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments

Nicolás de Roux, Marcela Eslava, Santiago Franco and Eric Verhoogen

No 28323, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses output- and input-quantity information and external instruments for materials and labor choices to improve production-function estimates. In rich Colombian data on producers of rubber and plastic products, we construct the external instruments from exchange-rate movements and variation in the “bite” of the minimum wage. Under assumptions of constant elasticities of substitution among outputs and inputs within firms, we aggregate from the firm-product to the firm level and show how quality and variety choices may bias quantity-based estimators. We supplement the external instruments with internal instruments — lagged levels and differences of input choices — in a two-step approach, estimating a difference equation to recover the materials and labor coefficients and a levels equation to recover the capital coefficient. Our estimates imply markups that are 67-70% of those implied by standard proxy-variable methods. A simple Monte Carlo simulation illustrates the advantages of our approach in a controlled setting with firm-level input-quality differences.

JEL-codes: D24 L1 L65 O14 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-eff
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Related works:
Working Paper: Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments (2021)
Working Paper: Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments (2021)
Working Paper: Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments (2020)
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