Simultaneous Estimation of Production Functions and Capital Stocks for Developing Countries

Abstract

Estimation of production functions is important for both forecasting and planning purposes. In developing countries, the lack of data, especially on capital stocks, hampers econometric work and leads to the use of crude methods in the estimation of production functions. In this paper, we propose a method equally useful for the estimation of production functions when there are no data on capital stock, and for the recovery of capital stock from the estimated production function. A simulation analysis demonstrates the optimal properties of the technique, which is subsequently applied to the estimation of aggregate production functions for a number of countries at different stages of development.