The Impact of Model Choice on Estimates of Regional TFP

Abstract

A large range of different approaches to determine a region’s total factor productivity (TFP) is currently used in the literature. As there is no generally recognized method, it is an important issue whether different approaches produce comparable results or whether results depend heavily on the chosen method. By employing a data set of 220 European regions over the period from 1990 to 2007, the present work compares a set of TFP estimation approaches and examines whether regional TFP levels and TFP growth rates obtained from the various approaches differ considerably from each other. More specifically, the neoclassical accounting approach, the cross-section approach, the pooled panel approach, and the fixed-effects approach are investigated. Furthermore, this article proposes an extension of the fixed-effects approach that allows estimation of both regional TFP levels and region-specific, long-term TFP growth rates in a single estimation procedure. The results clearly demonstrate that the choice between the examined approaches has an essential impact on estimation results for both TFP levels and TFP growth rates. From the apparent differences between the obtained results, it is reasonable to expect that follow-up analyses based on TFP estimates, for example, studies investigating the determinants of regional TFP, are affected by the model choice to a considerable extent. Therefore, it is important to examine whether one model is superior to others or whether it is only up to the scholar to choose a model.