Producer price dispersion,real output,and the analysis of production

For many years, economists have successfully analyzed aggregate production data using the single price assumption to construct real output. However, economists using these same techniques to examine firm and establishment level data have had difficulty interpreting the ensuing results. This paper explores whether price dispersion across individual producers could explain these problems. Using data from the hydraulic cement industry, this paper shows that omitting individual prices introduces measurement errors in real output that are correlated with factor prices. These errors lead to biased estimates of the production function and productivity growth equations. A method of simultaneously estimating real output and price is introduced to overcome these problems.The refereeing process of this paper was handled through R. Sickles.