On multicollinearity in production functions with collinear inputs and correctly specified disturbances

Abstract

The Cobb-Douglas model is widely applied in econometrics and other areas of research. The model, with strongly collinear inputs has been estimated under alternative correctly specified error terms. The impact of multicollinearity , is seen to be more severe in the multiplicative error model than in the additive error model.Our result also shows that the trend of the effect of multicollinearity is ambiguous as sample size increases-sample size cannot be said to have purged the models of the effect of multicollinearity.