Assessing the effects of measurement errors on the estimation of production functions

This article explores to what extent the poor results that are often found when estimating parameters of production functions can be attributed to measurement errors, due to the use of common price deflators across firms. Because of the lack of detailed micro‐economic data, econometricians have to rely on industry‐wide deflators when computing outputs and intermediate inputs. A unique feature of the longitudinal data used in this paper is that it reports firm‐level prices. This allows for a comparative assessment of production function parameters where the outputs and intermediate inputs are computed using both firm‐specific prices and industry‐wide deflators. The empirical results presented in this paper show that the use of common deflators across firms leads to lower scale estimates, mainly because of a large downward bias in the estimated coefficients for labour. Copyright © 2006 John Wiley & Sons, Ltd.     

Public support for performing arts. Efficiency and productivity gains in eleven European countries

This paper investigates the importance of public cultural expenditure for the efficiency and productivity of the performing arts (PA) firms. To this aim, we estimate a translog production function using the stochastic frontier approach (SFA), and we obtain the estimates of both technical efficiency and its determinants for the PA firms in EU-11 countries over the period 2009–2017. The large panel data set enables the application of robust true random-effects SFA techniques, which control for noise, unobserved firms' heterogeneity and endogeneity of the inputs. Moreover, by estimating a production function, the characteristics of the production technology in the PA sector is also derived. The empirical results demonstrate that PA firms are technically inefficient, implying that the investigated firms could increase their artistic output between 32 and 42% and that decreasing returns to scale are prevalent, due to the presence of too many micro and large-scale firms in the European PA sector. In contrast to the seminal Baumol and Bowen's [5] paper, we also demonstrate that the total factor productivity (TFP) increased in the EU PA firms over the examined period. Technical efficiency, although relatively low, was the main driver of this productivity growth, as opposed to scale efficiency change or technological change, which display very small or no increases. We also find that, contrary to the common wisdom on its negative effects on firm efficiency, public spending on culture increases the efficiency of PA firms. Within this context some policy implications are discussed.     

Labor's liquidity service and firing costs

This paper studies the specific effect that firing costs can have on firms facing liquidity constraints. When firing costs are zero and a time gap exists between production and its associated revenues, firing allows firms to hold on to their liquid assets by saving on wages, and thus, allows firms to cope better with liquidity shocks when external financing is too costly or unavailable. I refer to this feature as labor's liquidity service. Higher firing costs reduces the value of labor's liquidity service, and thus, increases firms' incentive for hoarding liquidity and reduces firms' demand for production inputs. In addition to this negative effect at the creation margin of production, firing costs have a relatively higher positive effect on the destruction margin of production of financially restricted firms. This paper presents a model that develops these ideas and shows that the presence of firing costs has a stronger negative effect on the output of firms facing liquidity constraints. Regression analysis, based on country-industry panel data sets, provides empirical evidence consistent with the liquidity service effect of firing costs. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small, and more likely financially constrained, firms.     

The response of prices,sales, and output to temporary changes in demand

We determine empirically how automakers accommodate shocks to demand. Using data on production, sales, and transaction prices, we estimate a dynamic profit maximization model of the firm. We demonstrate that when an automaker is hit with a vehicle‐specific demand shock, sales respond immediately and prices respond very modestly. Further, when accounting for non‐convexities in the cost function, production responds with a delay. Over time, shocks are absorbed almost entirely through adjustments in sales and production rather than prices. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the 11 September 2001 terrorist attacks. Copyright © 2009 John Wiley & Sons, Ltd.     

A General Method of Deriving the Inefficiencies of Banks from a Profit Function

This article develops a new method of estimating inefficiencies in joint production and shows that unlike the approaches utilized in the previous studies of inefficiency, this method maintains a consistent relationship between the error term of a profit function and the error terms of its price derivatives. A useful by-product of the method is a proof of a Hotelling-like lemma that relates stochastic input demand and output supply functions to stochastic profit functions. While the previous studies fit a single frontier to data on all firms, this paper estimates a frontier unique to every observed firm to allow each one to have a different potential of achieving maximal levels of profit. The new method is applied in the analysis of annual data, 1984–1989, for U.S. commercial banks. Both the analytical and numerical results of the paper show that the residual that the previous studies attribute to inefficiency includes the effects of excluded variables and of inaccuracies in the specified functional forms. Once accurate estimates of these effects are subtracted from the residual, the distortions in the measured inefficiencies should be considerably reduced. Consequently, this article considers how such estimates might be obtained.     

The shale oil revolution and the global oil supply curve

We focus on the implications of the shale oil boom for the global supply of oil. In order to derive testable implications, we introduce a simple stylized model with two producers, one facing low production costs and one higher production costs but potentially lower adjustment costs, competing à la Stackelberg. We find that the supply function is flatter for the high cost producer and that the supply function for shale oil producers becomes more responsive to demand shocks when adjustment costs decline. On the empirical side, we apply an instrumental variable approach using estimates of demand-driven oil price changes derived from a standard structural VAR of the oil market. A main finding is that global oil supply is rather vertical, with a short-term elasticity around 0.05. A rolling sample reveals that the shale oil boom does not appear to have fundamentally changed the contours of global oil production, but there is evidence for the oil supply curve to become more vertical in Saudi Arabia and more price responsive in the United States.     

Bias and Sensitivity of Multipliers

Multipliers measure the derivatives of endogenous variables with respect to exogenous shocks and are functions of the structural parameters of an economic model. Substitution of the structural parameter estimates yields a so-called derived estimate for a multiplier or any reduced-form parameter. Derived estimates are biased. This paper presents first-order approximations to the biases and sensitivities of multipliers. The good performance of a flawed formula in input–output analysis is illuminated.     

Estimates of the demand for medical care under different functional forms

We estimate price and income elasticities from a linear, log-linear, and the almost ideal demand model (with and without an adjustment for selectivity bias) in an effort to show that special attention should be paid to the underlying assumptions of consumer behaviour when estimating a medical care demand model. The literature on medical care utilization is extended by incorporating two major components of spending as separate demands in a system of medical care spending. We find that estimates of elasticities vary depending on the functional form of the estimating equation, thus questioning the usefulness for policy purposes of single estimates of elasticities.     

Compositional change,aggregation, and dynamic factor demand. Estimates on a panel of manufacturing firms

Most empirical research on investment and dynamic factor demand has used aggregated data. The large number of authors who have cited this as a source of problems strongly suggests possible benefits from analyzing individual firm data. This paper presents an analysis of a panel dataset of US manufacturing firms. Several models, based on cost minimization and a three-factor Cobb–Douglas technology, are developed. The differences concern whether the technology varies across two-digit SIC industries, the presence of fixed adjustment lags, and the determinants of adjustment costs. Identification relies on the rational expectations hypothesis, and estimation on non-linear 3SLS. The estimates indicate that versions with the adjustment lag perform better than others. Conditional elasticities reveal that factor demand responds rapidly to anticipated changes in output and factor prices, a finding consistent with other recent work. It appears that the factor demand of large firms is more price sensitive and less sensitive to output than small firms, consistent with recent work on credit market imperfections. Comparison of the results based on the pooled and the industry varying technologies indicate that the use of aggregate data is indeed a source of problems.     

THE ROLE OF INVENTORIES AND SPECULATIVE TRADING IN THE GLOBAL MARKET FOR CRUDE OIL

We develop a structural model of the global market for crude oil that for the first time explicitly allows for shocks to the speculative demand for oil as well as shocks to flow demand and flow supply. The speculative component of the real price of oil is identified with the help of data on oil inventories. Our estimates rule out explanations of the 2003–2008 oil price surge based on unexpectedly diminishing oil supplies and based on speculative trading. Instead, this surge was caused by unexpected increases in world oil consumption driven by the global business cycle. There is evidence, however, that speculative demand shifts played an important role during earlier oil price shock episodes including 1979, 1986 and 1990. Our analysis implies that additional regulation of oil markets would not have prevented the 2003–2008 oil price surge. We also show that, even after accounting for the role of inventories in smoothing oil consumption, our estimate of the short‐run price elasticity of oil demand is much higher than traditional estimates from dynamic models that do not account for for the endogeneity of the price of oil. Copyright © 2013 John Wiley & Sons, Ltd.     

A Cost System Approach to the Stochastic Directional Technology Distance Function with Undesirable Outputs: The Case of us Banks in 2001–2010

This paper offers a methodology to address the endogeneity of inputs in the directional technology distance function (DTDF)‐based formulation of banking technology which explicitly accommodates the presence of undesirable nonperforming loans—an inherent characteristic of the bank's production due to its exposure to credit risk. Specifically, we model nonperforming loans as an undesirable output in the bank's production process. Since the stochastic DTDF describing banking technology is likely to suffer from the endogeneity of inputs, we propose addressing this problem by considering a system consisting of the DTDF and the first‐order conditions from the bank's cost minimization problem. The first‐order conditions also allow us to identify the ‘cost‐optimal’ directional vector for the banking DTDF, thus eliminating the uncertainty associated with an ad hoc choice of the direction. We apply our cost system approach to the data on large US commercial banks for the 2001–2010 period, which we estimate via Bayesian Markov chain Monte Carlo methods subject to theoretical regularity conditions. We document dramatic distortions in banks' efficiency, productivity growth and scale elasticity estimates when the endogeneity of inputs is assumed away and/or the DTDF is fitted in an arbitrary direction. Copyright © 2015 John Wiley & Sons, Ltd.     

Estimation of technical change and price elasticities: a categorical time–varying coefficient approach

We propose a categorical time-varying coefficient translog cost function, where each coefficient is expressed as a nonparametric function of a categorical time variable, thereby allowing each time period to have its own set of coefficients. Our application to U.S. electricity firms reveals that this model offers two major advantages over the traditional time trend representation of technical change: (1) it is capable of producing estimates of productivity growth that closely track those obtained using the Törnqvist approximation to the Divisia index; and (2) it can solve a well-known problem commonly referred to as “the problem of trending elasticities”.     

Estimating the Demand for Housing, Land, and Neighbourhood Characteristics

This paper provides estimates of the structure of demand for individual housing and neighbourhood characteristics and for land in two British cities. We estimate a hedonic price function, and from this obtain the implicit prices of house attributes. These prices are used to estimate a demand system for each city. These perform well, and enable us to calculate price and income elasticities for each of the non-dichotomous characteristics and for land. To counteract criticisms of demand estimates derived within the hedonic framework a method is developed for selecting an appropriate set of instrumental variables. Estimates derived from this method, however, differ only slightly from those obtained using the conventional techniques. Several features of these estimates provide insights into the unusual characteristics of the British housing market, the effects of constraints imposed by land use planning, and the effects of changing income distribution on the structure of demand.     

What inventories tell us about aggregate fluctuations—A tractable approach to (S,s) policies

We estimate a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments (in addition to explaining inventory fluctuations); (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations, in contrast to the findings of the recent general-equilibrium inventory literature; and (iii) aggregate demand shocks become more important than technology shocks in explaining the business cycle once inventories are incorporated into the model. An independent contribution of our paper is that we develop a solution method for analytically solving (S,s) inventory policies in general equilibrium models with heterogeneous firms and a large aggregate state space, and we illustrate how standard log-linearization methods can be used to solve various versions of our inventory model, generate impulse response functions, and estimate the model׳s deep structural parameters.     

Risk shocks and housing supply: A quantitative analysis

This paper analyzes the role of stochastic uncertainty in a multi-sector housing model with financial frictions. We include time varying uncertainty (i.e. risk shocks) in the technology shocks that affect housing production and provide estimates of the time-series properties of risk shocks by using firm level productivity data. The analysis demonstrates that risk shocks to the housing production sector are a quantitatively important impulse mechanism for understanding housing price movements. Specifically, the model can match the volatility of housing prices observed in the data. It is also demonstrated that adjustment costs are important in replicating the contemporaneous correlation of housing prices with GDP and residential investment. Critically, bankruptcy costs act as an endogenous markup factor in housing prices and are an important determinant of house price volatility. However, in comparison to housing demand shocks, risk shocks have low explanatory power for real quantities.     

Technical efficiency and region The U.S. manufacturing sector 1972–1977

In this paper we estimate the extent of technological bias in an interregional context for U.S. manufacturing during the period 1972–1977 using a factor augmenting production function approach. We present estimates of the elasticity of factor substitution for each of the 48 states in the sample using a variable elasticity of substitution production function. Next, we use these estimates to generate estimates of the rates of change in the efficiencies of capital and labor inputs and compare these estimates across states and census regions. We also examine and compare estimates of total factor productivity across states and regions. We ,find that the average annual rates of growth of capital efficiency during the period are 5.5 percent in the Northeast, 5.3 percent in the Northcentral, 5.6 percent in the West and 3.1 percent in the South. The rates of change of the efficiencies of labor are found to be negative across all regions except the South. The rates of change of total factor productivity are found to be 1.7 percent in the Northeast, 2.3 percent in the Northcentral, 2.4 percent in the West and 1.7 percent in the South. We also find that between 33 percent and 56 percent of the growth of output across regions is due to technical progress.     

Agglomeration elasticities and firm heterogeneity

This paper examines three key issues encountered when estimating the relationship between agglomeration and multi factor productivity (‘agglomeration elasticities’): the sorting of heterogeneous firms, the convexity of agglomeration effects, and the challenges of identifying the impact of persistent spatial differences in effective density. We use a firm-level panel containing production data together with detailed information on the geographic location of employment, covering a high proportion of the New Zealand economy. We are able to control for heterogeneity along firm, region, and industry dimensions, and to estimate separate agglomeration elasticities across industries and regions. Sorting leads to upward biased elasticity estimates but using firm fixed effects can lead to downward bias due to the highly persistent nature of agglomeration variables. Our preferred estimates control for sorting across regions and industries. Overall, we find a positive agglomeration elasticity of 0.066. Within industries and, to a lesser extent within regions, there is pronounced variation in the strength of agglomeration effects, and evidence of decreasing returns to agglomeration. High density areas attract firms that benefit most from agglomeration.     

一类价格调整问题的数学模型及其求解方法

虽然市场需求是价格的函数，但企业在价格调整实践中往往不能直接获取需求函数的具体表达式，而只能在某一给定价格水平下观察到市场需求量的值。因此，企业通常不能直接利用需求函数来调整价格以完成预期的市场需求调整的战略计划。本文将企业为达到市场需求战略调整目的而考虑的价格调整问题归结为一个隐式互补问题。在该模型中，企业可以依据自身经营战略目标的调整相应地调整各类产品的市场价格，使得价格调整后的产品销量迭到预定的目标。文章给出了求解这类隐式互补问题的直接迭代法，并给出了数值结果。     

An iterative approach to the estimation of the abatement costs of harmful emissions

The ability to quantify tradeoffs involved in the process of reducing harmful emissions is essential to successful policy-making in the environmental planning area. The approach by Färe et al. (J Econom 126: 469–492, 2005) to computing point estimates of the marginal abatement costs (MACs) of reducing pollution by estimating the directional output distance function has been gaining popularity in recent years. The contribution of this study is to compute MACs as slopes of the iterated parametric production possibilities frontier (PPF) estimated on the basis of the set of efficient projections of observable output combinations obtained from the parameters of directional output distance function. Policy makers are thus provided with the general shape of the production possibilities set for a polluting technology rather than with a set of point estimates of the MACs. We apply our methodology to a balanced panel of seven Korean manufacturing sectors spanning the period between 1999 and 2009, obtaining theoretically consistent concave PPFs based on a large set of directional output distance vectors. Finally, we estimate the parameters of a directional output distance function corresponding to the iterated PPF.     

时间偏好与居民住房需求的内生波动

从时间偏好内生化角度研究居民住房需求随年龄波动的微观机制,理论模型表明：即使没有其他外生冲击,年龄的变化也会引起居民住房需求的内生波动。具体来看,居民住房需求随年龄存在先上升后下降的倒“U”型波动趋势;进一步地,利用中国家庭住户收入项目调查数据（CHIPS）对理论模型结论进行了实证检验,该结论在修正样本选择性偏误和稳健性检验后仍然成立。因此在长期中必须注意居民住房需求波动对我国房地产市场发展的影响。