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Testing the convexity hypothesis in nonparametric cost functions

Author

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  • Kerstens, Kristiaan
  • Zhao, Shirong

Abstract

We develop statistical tests to formally test the convexity axiom for cost functions by extending a recently developed statistical tests in nonparametric models of production. The tests are applied to a panel of US electric power generation plants and strong evidence against convexity is found for most years in the resulting cost functions. Our results suggest that empirical researchers need to be more cautious about the often implicit embedding of the convexity assumption for the cost functions.

Suggested Citation

  • Kerstens, Kristiaan & Zhao, Shirong, 2025. "Testing the convexity hypothesis in nonparametric cost functions," Economics Letters, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176525000333
    DOI: 10.1016/j.econlet.2025.112196
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    More about this item

    Keywords

    Convexity; Cost function; Convex technology; Nonconvex technology;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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