Estimation Of Production Technology Research Articles

Estimation of production technology when the objective is to maximize return to the outlay

This paper deals with estimation of production technology where endogeneous choice of input and output variables is explicitly recognized. To address this endogeneity issue, we assume that producers maximize return to the outlay. We start from a flexible (translog) transformation function with a single output and multiple inputs and show how the first-order conditions of maximizing return to the outlay can be used to come up with an ‘estimating equation’ that does not suffer from the econometric endogeneity problem although the output and input variables are chosen endogenously. This is because the regressors in this estimating equation are in ratio forms which are uncorrelated with the error term under the assumption that producers maximize return to the outlay. The analysis is then extended to the multiple outputs and multiple inputs case with technical inefficiency. Although the estimating equations in both single and multiple output cases are neither production nor distance functions, they can be estimated in a straightforward manner using the standard stochastic frontier technique without worrying about endogeneity of the regressors. Thus, we provide a rationale for estimating the technology parameters consistently using an econometric model which requires data on only input and output quantities.

Testing cost vs. profit function

The empirical literature on estimation of production technology mostly focuses on estimation of dual cost functions. Estimation of a profit function is not that common. Here, we formally test whether the production technology should be represented by a cost or profit function. We also derive elasticities associated with the long-run profit function from the estimated cost function.

The Structure of Technology with Endogenous Capital Utilization

A model is presented for the estimation of production technology when capital is endogenously utiliz ed. The present model permits the firm to choose the rate of utilizat ion and level of maintenance applied to its capital equipment such th at the user cost of capital services is minimized. The model is one o f two-stage optimization and estimation. The two stages are integrate d, using duality theory, through the generation of an instrumental us er cost variable in the first stage. The instrumental user cost is th en utilized for the estimation of the aggregate technology. The resul ts are compared to results obtained from standard models with exogeno us capital utilization and the emerging biases are discussed. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.