Estimating Production Functions When Productivity Change is Endogenous

Marc-Andreas Muendler

Current draft: Oct 31, 2007
First draft: Mar 14, 2001

University of California, San Diego


abstract

Production function estimation on micro data suffers from persistent unobserved shocks that vary within firms and cause bias. This paper presents an estimation model where the firm chooses capital investment and productivity-relevant intangible assets in response to market conditions under partly fixed adjustment costs. Estimation on Brazilian manufacturing firm data suggests that (i) firms' unobserved shocks are associated with productivity responses to competitive conditions and that (ii) a suitable productivity proxy is investment interacted with firm-specific competition variables. Identification does not rely on timing assumptions, and non-positive investment observations can be retained. Bootstraps show that the new proxy yields less dispersed coefficient estimates than alternatives while remedying bias.

jel: C51, D24


background

  • replication
    • stata 7 code for complete replication (see !readme.txt) [zip 248k]
    • auxiliary data for complete replication [zip 7,705k]
  • supporting files
  • cesifo working paper [1143] version