The Interplay between Micro-Frontier and Sectoral Short-Run Production Functions

Abstract

We apply Leif Johansen's dynamic production function framework to the development of the Finnish brewery industry over a 30-year time span, 1955 to 1984, based on micro data (plants). The relationship between the micro-frontier and short-run industry production functions is analysed, particularly with respect to the evidence of embodied technical progress. The empirical analysis reveals striking differences in the time pattern of productivity growth of the two functions, illustrates the importance of capacity expansion for technical progress at the frontier, and clarifies the distinction between embodied and disembodied technical progress.