The Structure Of Production Technology Productivity And Aggregation Effects

This is a sequel to an earlier paper by the author, Dhrymes (1990). Using the LRD sample, that paper examined the adequacy of the functional form specifications commonly employed in the literature of US Manufacturing production relations. The "universe" of the investigation was the three digit product group; the basic unit of observation was the plant; the sample consisted of all "large" plants, defined by the criterion that they employ 250 or more workers. The study encompassed three digit product groups in industries 35, 36 and 38, over the period 1972-1986, and reached one major conclusion: if one were to judge the adequacy of a given specification by the parametric compatibility of the estimates of the same parameters, as derived from the various implications of each specification, then the three most popular (production function) specifications, Cobb-Douglas, CES and Translog all fell very wide of the mark. The current paper focuses the investigation on two digit industries (but retains the plant as the basic unit of observation), i.e., our sample consists of all "large" manufacturing plants, in each of Industry 35, 36 and 38, over the period 1972-1986. It first replicates the approach of the earlier paper; the results are basically of the same genre, and for that reason are not reported herein. Second, it examines the extent to which increasing returns to scale characterize production at the two digit level; it is established that returns to scale at the mean, in the case of the translog production function are almost identical to those obtained with the Cobb-Douglas function.1 Finally, it examines the robustness and characteristics of measures of productivity, obtained in the context of an econometric formulation and those obtained by the method of what may be thought of as the "Solow Residual" and generally designated as Total Factor Productivity (TFP). The major finding here is that while there are some differences in productivity behavior as established by these two procedures, by far more important is the aggregation sensitivity of productivity measures. Thus, in the context of a pooled sample, introduction of time effects (generally thought to refer to productivity shifts) are of very marginal consequence. On the other hand, the introduction of four digit industry effects is of appreciable consequence, and this phenomenon is universal, i.e., it is present in industry 35, 36 as well as 38. The suggestion that aggregate productivity behavior may be largely, or partly, an aggregation phenomenon is certainly not a part of the established literature. Another persistent phenomenon uncovered is the extent to which productivity measures for individual plants are volatile, while two digit aggregate measures appear to be stable. These findings clearly calls for further investigation.