Correcting for biases when estimating production functions: an illusion of the laws of algebra?

This paper shows that the endogeneity bias that allegedly appears when estimating production functions using value data, and which the literature has tried to deal with since the 1940s, is simply the result of omitted-variable bias due to a poor approximation to an accounting identity. This problem...

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Bibliographic Details
Published in:Cambridge journal of economics 2008-05, Vol.32 (3), p.441-459
Main Authors: Felipe, Jesus, Hasan, Rana, McCombie, J. S. L.
Format: Article
Language:English
Subjects:
Accounting identity
Accounting theory
Approximation
Bias
C13
Coefficients
D24
Development banks
Econometrics
Economic statistics
Economic theory
Economics
Endogeneity
Estimates
Estimation
Estimation bias
Growth models
Mathematical constants
Mathematical models
National accounting
O47
Omitted-variable bias
Production estimates
Production function
Production functions
Public policy
Stock shares
Studies
Time series
Value added
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Description
Summary:This paper shows that the endogeneity bias that allegedly appears when estimating production functions using value data, and which the literature has tried to deal with since the 1940s, is simply the result of omitted-variable bias due to a poor approximation to an accounting identity. This problem has no econometric solution. As a result, recent attempts to solve the problem by developing new estimators are questioned. The only possible way to estimate the technological parameters of the production function is to use physical quantities.
ISSN:0309-166X
1464-3545
DOI:10.1093/cje/bem043