Quality Adjusted Cost Functions

Paul Gertler and Donald Waldman ()

No 3567, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a simple method for estimating cost functions in the presence of endogenous and unobserved quality. The theory of production, the equilibrium conditions implied by optimizing behavior, and exogenous influences on product demand are used to identify the model. An important advantage of the method is that the data requirements, above those necessary for standard cost function estimation, are minimal and the data are usually readily available. Specifically, exogenous information that influences the demand for the firm's product is required. We apply this method to estimate quality-adjusted cost functions in the nursing home industry. Estimation of a translog cost function that ignores quality yields seriously misleading estimates of marginal cost and economies of scale. In particular, while estimation of a quality-exogenous cost function reports economies of scale, estimation of a quality adjusted cost function reveals diseconomies of scale for high quality homes, constant returns to scale for average quality homes, and economies of scale for low quality homes.

Date: 1990-12
Note: EH
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published as "Quality Adjusted Cost Functions and Policy Evaluation in the Nursing Home Industry", Journal of Political Economy, Vol. 100, no. 6, December 1992,pp. 1232-1256

Downloads: (external link)
http://www.nber.org/papers/w3567.pdf (application/pdf)

Related works:
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:nbr:nberwo:3567

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w3567

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().