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A Note on the Importance of Testing for Regularities for Estimated Flexible Functional Forms

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  • Kjell Salvanes
  • Sigve Tjøtta

Abstract

In empirical productivity analysis it has become customary to use flexible functional forms to represent a firm's production technology by estimating cost functions. In this note we suggest a procedure to calculate the region where an estimated translog cost function meet the required regularities (positive cost, positive marginal cost, homogeneous, monotonicity and concavity in input prices). We calculate this region for the US Bell cost function as reported by Evans and Heckman (1984, 1986), and show that the estimated cost function had negative marginal cost in most of the test region. Copyright Kluwer Academic Publishers 1998

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  • Kjell Salvanes & Sigve Tjøtta, 1998. "A Note on the Importance of Testing for Regularities for Estimated Flexible Functional Forms," Journal of Productivity Analysis, Springer, vol. 9(2), pages 133-143, March.
    • Handle: RePEc:kap:jproda:v:9:y:1998:i:2:p:133-143
    DOI: 10.1023/A:1018304516721
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    1. Ying, John S & Shin, Richard T, 1993. "Costly Gains to Breaking Up: LECs and the Baby Bells," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 357-361, May.
    2. Wales, Terence J., 1977. "On the flexibility of flexible functional forms : An empirical approach," Journal of Econometrics, Elsevier, vol. 5(2), pages 183-193, March.
    3. Evans, David S & Heckman, James J, 1986. "A Test for Subadditivity of the Cost Function with an Application to the Bell System: Erratum," American Economic Review, American Economic Association, vol. 76(4), pages 856-858, September.
    4. Evans, David S & Heckman, James J, 1984. "A Test for Subadditivity of the Cost Function with an Application to the Bell System," American Economic Review, American Economic Association, vol. 74(4), pages 615-623, September.
    5. Richard T. Shin & John S. Ying, 1992. "Unnatural Monopolies in Local Telephone," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 171-183, Summer.
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    Cited by:

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    5. Kjersti-Gro Lindquist & Terje Skjerpen, 2000. "Explaining the change in skill structure of labour demand in Norwegian manufacturing," Discussion Papers 293, Statistics Norway, Research Department.
    6. W D A Bryant, 2009. "General Equilibrium:Theory and Evidence," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 6875, December.
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    12. Maximilian Koppenberg, 2023. "Markups, organic agriculture and downstream concentration at the example of European dairy farmers," Agricultural Economics, International Association of Agricultural Economists, vol. 54(2), pages 161-178, March.
    13. Carlo Perroni, 1999. "A Flexible, Globally Regular Representation of Convex Production Possibilities Frontiers," Journal of Productivity Analysis, Springer, vol. 12(2), pages 153-159, September.
    14. Sverre Kittelsen & Benny Winsnes & Kjartan Anthun & Fanny Goude & Øyvind Hope & Unto Häkkinen & Birgitte Kalseth & Jannie Kilsmark & Emma Medin & Clas Rehnberg & Hanna Rättö, 2015. "Decomposing the productivity differences between hospitals in the Nordic countries," Journal of Productivity Analysis, Springer, vol. 43(3), pages 281-293, June.
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    16. Sauer, J.F., 2005. "“Efficiency Flooding”: Black-Box Frontiers and Policy Implications," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(1), pages 17-52.

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    More about this item

    Keywords

    Estimated flexible functional forms; subadditivity;

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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