Computer Session 1: The Production Function

Data on the value added, labour input and capital (gross value of plant and equipment)
is contained in the Stata file prodfunc.dta. The variables are the following:
Obs
Valueadd
Labour
Capital

=
=
=
=

Observation number
Value added
Labour input
Capital stock

EXERCISE
Purpose: Specification and estimation of linear regression models.
A. Load the data using the provided Stata data file. Explore the data using different
Stata commands.
B. Specify and estimate the linear production function. Report the coefficients, the
R2, and the total, regression, and residual sums of squares. Interpret the
coefficients economically.
C. Include among the regressors a dummy variable for large firms, defined as firms
with Valueadd > 6000. What do you find? Interpret the results.
D. In the linear production function in part B, include among the regressors
separately the squares of value added and the lagged values of the value added
(does this make sense?). What happens to the fit of regression in both cases? Does
it increase or decrease? Could this have been observed already from the coefficient
of the variable included and/or its statistics?
E. Specify and estimate the loglinear production function. Report the coefficients, the
R2, and the total, regression, and residual sums of squares. Interpret the
coefficients economically; do they appear to be plausible? Test whether the
production function exhibits constant returns to scale.
F. In the linear production function in part B, add the variable labour + capital.
Similarly, in the loglinear production function in part E, add the variable labour
capital in logarithms. What happens when you perform the regressions? Why?