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

Ulrich Doraszelski and Lixiong Li

No 33939, NBER Working Papers from National Bureau of Economic Research, Inc

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. Furthermore, we show how a modification of the procedure ensures Neyman orthogonality, enhancing efficiency and robustness by rendering the asymptotic distribution of the GMM estimator in the second step of the estimation procedure invariant to estimation noise from the first step.

JEL-codes: D24 L10 O3 (search for similar items in EconPapers)
Date: 2025-06
Note: IO PR
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