Working Paper: NBER ID: w7819
Authors: James Levinsohn; Amil Petrin
Abstract: We introduce a new method for conditioning out serially correlated unobserved shocks to the production technology by building ideas first developed in Olley and Pakes (1996). Olley and Pakes show how to use investment to control for correlation between input levels and the unobserved firm-specific productivity process. We prove that like investment, intermediate inputs (those inputs which are typically subtracted out in a value-added production function) can also solve this simultaneity problem. We highlight three potential advantages to using an intermediate inputs approach relative to investment. Our results indicate that these advantages are empirically important.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Using intermediate inputs (C67) | Estimation of production function parameters (C51) |
| Intermediate inputs respond to productivity shocks (O49) | Estimation of production function parameters (C51) |
| Addressing simultaneity issues (C41) | Improved estimation outcomes (C51) |
| Intermediate inputs mitigate truncation bias (C24) | Consistent estimates of production function parameters (C51) |