The Inconsistency of Common Scales Estimators when Output Prices are Unobserved and Endogenous

Tor Klette and Zvi Griliches

Discussion Papers from Statistics Norway, Research Department

Abstract: This paper explores the inconsistency of common scale estimators when output is proxied by deflated sales, based on a common output deflator across firms. The problems arise when firms operate in an imperfectly competitive environment and prices differ between firms. In particular, we show that this problem reveals itself as a downward bias in the scale estimates obtained from production function regressions, under a variety of assumptions about the pattern of technology, demand and factor price shocks. The result also holds for scale estimates obtained from cost functions. The analysis is carried one step further by adding a model of product demand. Within this augmented model we examine the probability limit of the scale estimate obtained from an ordinary production function regression. This analysis reveals that the OLS estimate will be biased towards unity - or possibly a value below unity. We have included an empirical section which illustrates the issues. The empirical analysis presents a tentative approach to avoid the problems discussed in the theoretical part of this paper.

Keywords: Scale economies; imperfect competition; econometric misspecification; price heterogeneity. (search for similar items in EconPapers)
JEL-codes: C23 D24 (search for similar items in EconPapers)
Date: 1994-10
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Endogenous (1996)
Working Paper: The Inconsistency of Common Scale Estimators when Output Prices are unobserved and Endogenous (1992)
Working Paper: The Inconsistency of Common Scale Estimators When Output Prices Are Unobserved and Engogenous (1992)
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Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:127

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