Conditional Demands and Marginal Tax Reform

This paper examines Irish demand patterns using conditional demand functions. This overcomes the problems faced by traditional demand analysis which neglects the influence of labour supply and thus assumes weak separability. The conditional approach allows for more exact tests of weak separability using more flexible functional forms than is possible when estimating an unconditional commodity demand–labour supply model. The impact of the conditioned demand responses and the relaxation of weak separability on measures of marginal tax reform is examined.     

Estimating demand with distance functions: Parameterization in the primal and dual

Our purpose is to investigate the ability of different parametric forms to ‘correctly’ estimate consumer demands based on distance functions using Monte Carlo methods. Our approach combines economic theory, econometrics and quadratic approximation. We begin by deriving parameterizations for transformed quadratic functions which are linear in parameters and characterized by either homogeneity or which satisfy the translation property. Homogeneity is typical of Shephard distance functions and expenditure functions, whereas translation is characteristic of benefit/shortage or directional distance functions. The functional forms which satisfy these conditions and include both first- and second-order terms are the translog and quadratic forms, respectively. We then derive a primal characterization which is homogeneous and parameterized as translog and a dual model which satisfies the translation property and is specified as quadratic. We assess functional form performance by focusing on empirical violations of the regularity conditions. Our analysis corroborates results from earlier Monte Carlo studies on the production side suggesting that the quadratic form more closely approximates the ‘true’ technology or in our context consumer preferences than the translog.     

A Disaggregated Econometric Model Based on Flexible Functional Forms

This paper introduces an econometric input—output model for Western Germany in a disaggregation of 12 commodities and sectors. The ‘Jorgenson’-type equilibrium model is based on flexible functional forms on the supply and on the demand side of the commodity markets. For intermediate demand, the relationship between the translog function and its special cases—the Cobb-Douglas function— is exploited. Prices and production are endogenized by market-clearing conditions. The fully integrated model also endogenizes capital accumulation, a rudimental govern-ment budget and income distribution, as well as wages and labour demand on rationed labour markets. The results of a dynamic ex post simulation show that the model is able to depict the sectoral economic development in Germany in the sample period from 1970 to 1986.     

Estimating U.S. consumer preferences for meat with a flexible utility function

Direct and indirect translog utility functions provide budget share equations which are both flexible and consistent with the theory of utility maximization. These forms are attractive for modelling consumer behavior. Because of their flexibility they are ideal for testing hypotheses such as additivity of preferences. In this paper we use the translog methodology to analyze U.S. consumption of the four principal categories of meat-fish, beef, poultry, and pork. We decisively reject the hypothesis of additivity. However, further testing for partial additivity reveals that (beef) and (fish, poultry, pork) are additively separable subgroups of meat.     

The choice of functional forms for hedonic price equations: Comment

Rosen [13], Freeman [4], Halvorsen and Pollakowski [6], and others have stressed that economic theory does not suggest an appropriate functional form for hedonic price functions.¹ It consequently is reasonable to try several functional forms and utilize the multiple regression equation with the best performance. In this spirit, Halvorsen and Pollakowski [6] recommend using the Box-Cox flexible functional form for hedonic analysis and measuring best performance with a goodness of fit test. The Box-Cox methodology has also been adapted in hedonic studies by Goodman [5], Linneman [10], Blomquist and Worley [1], and Eberts and Gronberg [3].² The Box-Cox is particularly suited for testing functional forms because many familiar forms such as semilog, log linear, and translog are subsets of the flexible Box-Cox permitting nested hypothesis testing.In this note, we illustrate that the formal hypothesis testing advantage of the Box-Cox functional form is purchased at the expense of other important goals. The goal of most hedonic studies is to estimate the prices of the characteristics, to measure the response to changes in the prices, and/or to predict future expenditures. Using a best fit criterion to choose functional forms does not necessarily lead to more accurate estimates of characteristic prices. In fact, the large number of coefficients estimated with the Box-Cox functional form reduces the accuracy of any single coefficient which could lead to poorer estimates of specific prices. Second, because any negative number raised to a noninteger real power is imaginary, the traditional Box-Cox functional form is not suited to any data set containing negative numbers. Third, the Box-Cox functional form may be inappropriate for prediction. Since the mean predicted value of the untransformed dependent variable need not equal the mean of the sample upon which it is estimated, the predicted untransformed variable (housing value) will be biased. The predicted untransformed dependent variable may also be imaginary. Fourth, the nonlinear transformation results in complex estimates of slopes and elasticities which are often too cumbersome to use properly. We discuss each of these drawbacks and quantify them when possible in the remainder of this note.     

Incorporating monotonicity and concavity conditions in flexible functional forms

Empirical economists using flexible functional forms often face the disturbing choice of drawing inferences from an approximation violating properties dictated by theory or imposing global restrictions that greatly restrict the flexibility of the functional form. Focusing on the cost function, this paper presents an alternative approach which imposes monotonicity and concavity properties only over the set of prices where inferences will be drawn. An application investigating elasticities for Berndt-Wood data set using the translog, generalized Leontief, and symmetric generalized McFadden flexible functional forms illustrates the technique. © 1996 John Wiley & Sons, Ltd.     

On testing weak separability

A new framework for testing for the existence of a consistent aggregator for a subset of inputs in a production function is developed in terms of the variable profit function. In contrast to the Berndt–Christensen framework, in which the parametric restrictions required to attain weak separability also impose unwanted restrictions on the form of the aggregator, the aggregator function has a flexible functional form. Consequently this procedure should permit a less restrictive test of separability or aggregation. Application of the procedure to the data for U.S. manufacturing assuming a production function involving two labour inputs (blue- and white-collar workers) and two capital inputs (structures and equipment) leads to the conclusion that there does not exist a consistent aggregator for labor whereas there is some mild support for the existence of a consistent aggregator for capital.     

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

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.     

Efficiency measurement with multiple outputs and multiple inputs

This paper discusses modeling technical and allocative inefficiencies in both cost minimizing and profit maximizing frameworks with special emphasis on multiple inputs and multiple outputs. Both primal and dual models are considered for this purpose. In the primal approach we use a separable output and input function (the constant elasticity of transformation output function and Cobb-Douglas input function). The dual models assume translog cost or profit functions. Technical inefficiency is assumed to be random in the cross-sectional models, and fixed firm-specific parameter in the panel data models. Allocative inefficiencies are always treated as input-specific parameters. We derive exact relations linking technical inefficiency and allocative inefficiencies to cost and profit when the underlying technology is represented by a flexible functional form such as the translog. It is shown that appending a one-sided homoscedastic error term to model technical inefficiency, or neglecting technical inefficiency altogether in a translog profit tunciton results in model misspecification and inconsistent parameter estimates.     

Unbiased determination of production technologies

To determine whether an industry exhibits constant returns to scale, whether the production function is homothetic, or whether inputs are separable, a common approach is to specify a cost function, estimate its parameters using data such as prices and quantities of inputs, and then test the parametric restrictions corresponding to constant returns, a homothetic technology, or separability. Statistically, such inferences are valid if the true cost function is a member of the parametric class considered, otherwise the inference is biased. That is, the true rejection probability is not necessarily adequately approximated by the nominal size of the statistical test. The use of fixed parameter flexible functional forms such as the Translog, the generalized Leontief, or the Box-Cox will not alleviate this problem.The Fourier flexible form differs fundamentally from other flexible forms in that it has a variable number of parameters and a known bound, depending on the number of parameters, on the error, as measured by the Sobolev norm, of approximation to an arbitrary cost function. Thus it is possible to construct statistical tests for constant returns, a homothetic technology, or separability which are asymptotically size α by letting the number of parameters of the Fourier flexible form depend on sample size. That is, the true rejection probability converges to the nominal size of the test as sample size tends to infinity. The rate of convergence depends on the smoothness of the true cost function; the more times is differentiable the true cost function, the faster the convergence.The method is illustrated using the data on aggregate U.S. manufacturing of Berndt and Wood (1975, 1979) and Berndt and Khaled (1979).     

The Conduct of Management and the Management of Conduct: Contemporary Managerial Discourse and the Constitution of the ‘Competent’ Manager*

The character and conduct of the manager has formed a central focus of attempts to govern economic life throughout the present century. and current programmes of organizational change involve radical attempts to reconstitute the nature and conduct of management. This is attempted through the identification and implementation of management competencies. Discourses of organizational reform such as human resource management, total quality management and business process re-engineering all place a critical emphasis on anti-bureaucratic, organic and flexible forms of organization, which are also seen to require the development of particular capacities and predispositions among managers. Essential to their vision of ‘managerial work’ is a composite of ‘entrepreneurial’ attributes. Management competencies appear to offer a congenial method for the reconstitution of the manager along ‘entrepreneurial’ lines, not simply because they are inherently founded on managers'self-management and self-presentation of identified behaviours, but also because they represent individualized forms of business functions (and are often associated with the establishment of market relations within the organization).     

Why Are Concavity Conditions Not Satisfied in the Cost Function? The Case of Japanese Manufacturing Firms during the Bubble Period*

This paper examines empirically the reasons why Japanese manufacturing firms frequently fail to satisfy concavity of the cost function in input prices. We focus on the ‘bubble period’ in the 1980s when land was in great demand and land prices soared. By estimating the translog cost function with land as one of production inputs, we find that violation of concavity mainly resulted from weak bank–firm relationship and massive transactions of land. We also demonstrate that elasticities of substitution between land and other inputs are estimated quite differently if the firms violating concavity are not excluded from the analysis.     

Separability and separability flexibility of the CRESH function

The CRESH functional form has many desirable properties. It is globally regular for a wide range of parameter values, it includes the CES as a special case, and it has stable patterns of relative substitutability. However, while the CRESH form is defined to be implicitly additively separable, theordinary separability structure of the CRESH form has never been investigated. In this article, that deficiency is corrected by describing the separability structure of CRESH functions. In particular, it is shown that the CRESH form is separability flexible in the important three input case. This and its other properties may make the CRESH function the form of choice among existing three input production functions.The editor for this paper was Michael Denny.     

Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from A Robust Test

We propose a novel identification‐robust test for the null hypothesis that an estimated New Keynesian model has a reduced form consistent with the unique stable solution against the alternative of sunspot‐driven multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross‐equation restrictions (CER) that the New Keynesian system places on its reduced‐form solution under determinacy. If the CER are not rejected, sunspot‐driven expectations can be ruled out from the model equilibrium and we accept the structural model. Otherwise, we move to a second‐step and invert an Anderson and Rubin‐type test for the orthogonality restrictions (OR) implied by the system of structural Euler equations. The hypothesis of indeterminacy and the structural model are accepted if the OR are not rejected. We investigate the finite‐sample performance of the suggested identification‐robust two‐step testing strategy by some Monte Carlo experiments and then apply it to a New Keynesian AD/AS model estimated with actual US data. In spite of some evidence of weak identification as for the ‘Great Moderation’ period, our results offer formal support to the hypothesis of a switch from indeterminacy to a scenario consistent with uniqueness occurring in the late 1970s. Our identification‐robust full‐information confidence set for the structural parameters computed on the ‘Great Moderation’ regime turns out to be more precise than the intervals previously reported in the literature through ‘limited‐information’ methods. Copyright © 2014 John Wiley & Sons, Ltd.     

Estimation of technical and allocative inefficiency: A primal system approach

The estimation of technical and allocative inefficiencies using a flexible (translog) cost system is found to be quite difficult, especially when both the inefficiencies are random. In this paper we use the alternative primal system consisting of the production function (translog) and the first-order conditions of cost minimization. The estimation of the primal system is more straightforward and it enables us to estimate observation-specific technical and allocative inefficiencies, and their impact on input demand and cost. We use data on steam-electric generating plants from the U.S. to estimate the model using both Cobb–Douglas and translog production functions.     

The global properties of the two minflex Laurent flexible functional forms

The minflex Laurent flexible functional form is a special case of a second-order Laurent series expansion. The minflex Laurent, when constructed in square roots, is called the minflex Laurent (ML) generalized Leontief. The minflex Laurent (ML) translog model is the minflex Laurent in logarithms. We find that the regular region of the ML translog is most often even larger than that of the ML generalized Leontief model, except when substitutability is very low. We previously have shown that the regular region of the ML generalized Leontief is substantially larger than that of the usual translog and generalized Leontief models.     

On functional form representation of multi-output production technologies

The introduction of directional distance functions has given researchers an alternative to Shephard distance functions. In this paper we conduct a Monte Carlo study to investigate the performance of distance functions as an approximation for models of technology. Our results indicate that quadratic representations of technology have better approximation properties than translog parameterizations.     

Technical efficiency during economic reform in Nicaragua: evidence from farm household survey data

This paper employs a translog stochastic frontier model to examine technical efficiency of maize and bean farmers in two selected regions of Nicaragua using farm-level survey data for the 1994–1995 crop year. The average technical efficiency levels are 69.8 and 74.2% for maize and beans, respectively. The results from the maize and beans translog frontier functions show that farmers’ human capital represented by the level of schooling, access to formal credit and farming experience represented by age contribute positively to production efficiency, while farmers’ participation in non-farm employment tends to reduce production efficiency.     

An empirical comparison of flexible demand system functional forms

This paper compares the performance of eight frequently used flexible forms that are either (1) locally flexible, (2) ‘effectively globally regular’, or (3) asymptotically globally flexible. Results show that the functions with global properties generally perform better, particularly those models having asymptotic properties. Results, using US consumption data, indicate substitutability among the components of consumption at most data points. There is also some interesting substitution volatility around the time of recessions in the USA. Copyright © 2001 John Wiley & Sons, Ltd.