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Estimating the Production Function under Input Market Frictions

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  • Ajay Shenoy

    (University of California, Santa Cruz)

Abstract

Behind many production function estimators lies a crucial assumption that the firm's choice of intermediate inputs depends only on observed choices of other inputs and on unobserved productivity. This assumption fails when market frictions distort the firm's input choices. I derive a test for the assumption, which is rejected in several industries. Using weak identification asymptotics, I show that when the assumption fails, a simplified dynamic panel estimator can be used instead of choice-based methods because it requires choices to be distorted. I propose criteria for choosing between estimators, which in simulations yield lower error than either estimator alone.

Suggested Citation

  • Ajay Shenoy, 2021. "Estimating the Production Function under Input Market Frictions," The Review of Economics and Statistics, MIT Press, vol. 103(4), pages 666-679, October.
    • Handle: RePEc:tpr:restat:v:103:y:2021:i:4:p:666-679
    DOI: 10.1162/rest_a_00927
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    Cited by:

    1. Francesco Manaresi & Nicola Pierri, 2024. "The Asymmetric Effect of Credit Supply on Firm‐Level Productivity Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(4), pages 677-704, June.
    2. Samiul Haque & Micheal S. Delgado, 2024. "Labor market monopsony power in the manufacturing sector of four Sub‐Saharan African countries," LABOUR, CEIS, vol. 38(3), pages 331-349, September.
    3. Alvaro Aguirre & Matias Tapia & Lucciano Villacorta, 2021. "Production, Investment and Wealth Dynamics under Financial Frictions: An Empirical Investigation of the Selffinancing Channel," Working Papers Central Bank of Chile 904, Central Bank of Chile.
    4. Daniel A. Ackerberg, 2023. "Timing Assumptions and Efficiency: Empirical Evidence in a Production Function Context," Journal of Industrial Economics, Wiley Blackwell, vol. 71(3), pages 644-674, September.
    5. Anderton, Robert & Botelho, Vasco & Reimers, Paul, 2023. "Digitalisation and productivity: gamechanger or sideshow?," Working Paper Series 2794, European Central Bank.
    6. Ming Li, 2021. "Identification and Estimation in a Time-Varying Endogenous Random Coefficient Panel Data Model," Papers 2110.00982, arXiv.org, revised Nov 2024.
    7. Michael Rubens, 2023. "Management, productivity, and technology choices: evidence from U.S. mining schools," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 165-186, March.

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