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Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments

Author

Listed:
  • Nicolás de Roux
  • Marcela Eslava
  • Santiago Franco
  • Eric Verhoogen

Abstract

This paper develops a new method for estimating production-function parameters that can be applied in differentiated-product industries with endogenous quality and variety choice. We take advantage of data on physical quantities of outputs and inputs from the Colombian manufacturing survey, focusing on producers of rubber and plastic products. Assuming constant elasticities of substitution of outputs and inputs within fi rms, we aggregate from the fi rm-product to the firm level and show how quality and variety choices may bias standard estimators. Using real exchange rates and variation in the "bite" of the national minimum wage, we construct external instruments for materials and labor choices. We implement a simple two-step instrumental-variables method, fi rst estimating a difference equation to recover the materials and labor coeffcients and then estimating a levels equation to recover the capital coeffcient. Under the assumption that the instruments are uncorrelated with fi rms' quality and variety choices, this method yields consistent estimates, free of the quality and variety biases we have identif ed. Our point estimates differ from those of existing methods and changes in our preferred productivity estimator perform relatively well in predicting future export growth.

Suggested Citation

  • Nicolás de Roux & Marcela Eslava & Santiago Franco & Eric Verhoogen, 2021. "Estimating Production Functions in Differentiated-Product Industries with Quantity Information and External Instruments," Documentos CEDE 18705, Universidad de los Andes, Facultad de Economía, CEDE.
  • Handle: RePEc:col:000089:018705
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    References listed on IDEAS

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    Cited by:

    1. Filippo Belloc & Edilio Valentini, 2022. "Digging into the Technological Dimension of Environmental Productivity," Working Papers 2022.29, Fondazione Eni Enrico Mattei.
    2. Francesco Amodio & Nicolás de Roux, 2021. "Labor Market Power in Developing Countries: Evidence from Colombian Plants," Documentos CEDE 19267, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Robert Anderton & Vasco Botelho & Paul Reimers, 2023. "Digitalisation and productivity: gamechanger or sideshow?," Discussion Papers 2023-05, University of Nottingham, GEP.
    4. Rodríguez-Castelán, Carlos & López-Calva, Luis Felipe & Barriga-Cabanillas, Oscar, 2023. "Market concentration, trade exposure, and firm productivity in developing countries: Evidence from Mexico," World Development, Elsevier, vol. 165(C).
    5. Jamil, Nida & Chaudhry, Theresa Thompson & Chaudhry, Azam, 2022. "Trading textiles along the new silk route: The impact on Pakistani firms of gaining market access to China," Journal of Development Economics, Elsevier, vol. 158(C).
    6. Austan Goolsbee & Chad Syverson, 2022. "The Strange and Awful Path of Productivity in the US Construction Sector," NBER Chapters, in: Technology, Productivity, and Economic Growth, National Bureau of Economic Research, Inc.
    7. Andrés Álvarez & Juan Camilo Chaparro & Carolina González & Santiago Levy & Darío Maldonado & Marcela Meléndez & Natalia Ramírez & Marta Juanita Villaveces, 2022. "Reporte ejecutivo de la Misión de Empleo de Colombia," Documentos de trabajo 20156, Escuela de Gobierno - Universidad de los Andes.
    8. Pham, Hoang, 2023. "Trade reform, oligopsony, and labor market distortion: Theory and evidence," Journal of International Economics, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    production-function estimation; quality; variety; external instruments;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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