Working Paper: CEPR ID: DP15626
Authors: Nicolas De Roux; Marcela Eslava; Santiago Franco; Eric A. 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 firms, we aggregate from the firm-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, first estimating a difference equation to recover the materials and labor coefficients and then estimating a levels equation to recover the capital coefficient. Under the assumption that the instruments are uncorrelated with firms' quality and variety choices, this method yields consistent estimates, free of the quality and variety biases we have identified. Our point estimates differ from those of existing methods and changes in our preferred productivity estimator perform relatively well in predicting future export growth.
Keywords: No keywords provided
JEL Codes: L1; D24; O14; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| standard estimators of production functions (C51) | biased output elasticities (C51) |
| external instruments (real exchange rates and national minimum wage) (F31) | materials and labor coefficients (J30) |
| external instruments (real exchange rates and national minimum wage) (F31) | capital coefficient (E22) |
| materials and labor coefficients (J30) | production outcomes (E23) |
| capital coefficient (E22) | production outcomes (E23) |
| production function estimates (E23) | firm performance (L25) |