Production function estimation using subjective expectations data

Norris Keiller, Agnes, De Paula Neto, Aureo and Van Reenen, John ORCID: 0000-0001-9153-2907 (2024) Production function estimation using subjective expectations data. CEP Discussion Papers (CEPDP2018). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

Standard methods for estimating production functions in the Olley and Pakes (1996) tradition require assumptions on input choices. We introduce a new method that exploits (increasingly available) data on a firm's expectations of its future output and inputs that allows us to obtain consistent production function parameter estimates while relaxing these input demand assumptions. In contrast to dynamic panel methods, our proposed estimator can be implemented on very short panels (including a single cross-section), and Monte Carlo simulations show it outperforms alternative estimators when firms' material input choices are subject to optimization error. Implementing a range of production function estimators on UK data, we find our proposed estimator yields results that are either similar to or more credible than commonly-used alternatives. These differences are larger in industries where material inputs appear harder to optimize. We show that TFP implied by our pro-posed estimator is more strongly associated with future jobs growth than existing methods, suggesting that failing to adequately account for input endogeneity may underestimate the degree of dynamic reallocation in the economy.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2024 The Author(s)
Divisions:	Centre for Economic Performance Economics
Subjects:	H Social Sciences > HC Economic History and Conditions
JEL classification:	L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C21 - Cross-Sectional Models; Spatial Models; Treatment Effect Models O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
Date Deposited:	06 Feb 2025 16:27
Last Modified:	06 Feb 2025 16:27
URI:	http://eprints.lse.ac.uk/id/eprint/126812

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