Estimating complex production functions: The importance of starting values

Mark Neal ()

No WP1R07, Risk & Uncertainty Working Papers from Risk and Sustainable Management Group, University of Queensland

Abstract: Production functions that take into account uncertainty can be empirically estimated by taking a state contingent view of the world. Where there is no a priori information to allocate data amongst a small number of states, the estimation may be carried out with finite mixtures model. The complexity of the estimation almost guarantees a large number of local maxima for the likelihood function. However, it is shown, with examples, that a variation on the traditional method of finding starting values substantially improves the estimation results. One of the major benefits of the proposed method is the reliable estimation of a decision makerâs ability to substitute output between states, justifying a preference for the state contingent approach over the use of a stochastic production function.

Keywords: Production function, econometrics; starting values, state contingent production (search for similar items in EconPapers)
JEL-codes: C51 D24 (search for similar items in EconPapers)
Date: 2007-02
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Working Paper: Estimating complex production functions: the importance of starting values (2007)
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