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Lecture 8

Production functions - structural approaches

Rachel Griffith

RES Easter School, April 2017

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Overview

1. Griliches and Mairesse (1995), Production Functions: The Search for


Identification, NBER Working Paper No. 5067, March 1995

2. Klette (1999) Market power, Scale Economics and Productivity:


Estimates from a Panel of Establishement Level Data Journal of
Industrial Economics, XLVII (4), 451-476

3. Arellano and Bond (1991), Some Tests of Specification for Panel


Data: Monte Carlo Evidence and an Application to Employment
Equations, Review of Economic Studies, 277-297

4. Blundell and Bond (2000), GMM Estimation with Persistent Panel


Data: An Application to Production Functions, Econometric Reviews,
321-340

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Measuring productivity

I We are interested in knowing about parameters of production


functions for many reasons
I Long tradition of index number approaches to measuring productivity

Qit = Ait Ft (Kit Lit )

i: firm (or plant), t: time (year)


Qit : output
Lit : labour (or more generally a variable input)
Kit : capital (a quasi-fixed input)
Ait : Total Factor Productivity (TFP)

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Measuring productivity

I the Solow residual or growth in Total Factor Productivity (TFP):

∆Qit δQit Kit ∆Kit δQit Lit ∆Lit ∆Ait


= + +
Qit δKit Qit Kit δLit Qit Lit Ait

I rearrange
∆Ait ∆Qit δQit Kit ∆Kit δQit Lit ∆Lit
= − −
Ait Qit δKit Qit Kit δLit Qit Lit

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Measuring productivity
I consider Cobb-Douglas
Qit = Ait Lαit Kitβ e uit

I profit maximisation, price taking in labour market implies that wages


(wit ) are set equal to the marginal revenue product of workers
δQit
rit = wit
δLit
where rit is marginal revenue
I we can write
δQit δQit Lit
= αAit Kitβ Lα−1
it = αQit L−1
it =⇒ α =
δLit δLit Qit

I which implies that


Qit wit Lit
wit = αrit =⇒ α = ≡ sitL
Lit rit Qit
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Measuring productivity
I perfect competition in the product market implies that price is equal
to marginal revenue (rit = pit ), so we have
δQit Lit wit Lit
α= = ≡ sitL
δLit Qit pit Qit

I so we can take TFP growth,


∆Ait ∆Qit δQit Kit ∆Kit δQit Lit ∆Lit
= − −
Ait Qit δKit Qit Kit δLit Qit Lit

I and substitute in to get,


∆Ait ∆Qit ∆Kit ∆Lit
= − sitK − sitL
Ait Qit Kit Lit

I constant returns to scale implies that sitK + sitL = 1, so we only need to


know one factor share (labour)
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Measuring productivity

I This is convenient, because these are objects that are recorded in


many datasets
I There is a large literature using these index number methods (with
more general functional forms), including growth accounting,
international comparisons, etc.
I Hall (1988) and Klette (1999) build on this literature and highlight
the bias in measurement of TFP and growth in TFP in the presence of
imperfect competition

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Measuring productivity

I With imperfect competition in the product market marginal revenue


no longer equals price, if revenue is R = pQ, then marginal revenue is,
   
δR δp Q δp 1
r= =p+ Q =p 1+ =p 1−
δQ δq p δq 

I where it is the conjectured price and quantity response of competitors


(i.e. it is the elasticity of residual demand)

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Measuring productivity
I Profit maximisation now implies
 
1 Qit
wit = αpit 1 −
it Lit

I define
1 −1
 
wit Qit
µit = 1 − ; α = µit = µit sitL
it pit Lit

I TFP growth is now:


∆Ait ∆Qit ∆Kit ∆Lit
= − µit sitK − µit sitL
Ait Qit Kit Lit
 
∆Qit ∆Kit ∆Lit ∆Kit ∆Lit
= − sitK − sitL − (µit − 1) sitK + sitL
Qit Kit Lit Kit Lit

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Measuring productivity

I Klette estimates (I’m skipping some details)

ln(Qit ) = ln(Ait ) + µit s̄itL [ln(Lit ) − ln(Kit )] + ηit ln(Kit )

I to obtain estimates of µit (or it )


I if perfect competition than µ = 1

µit sitj = η
P
I note also that constant returns to scale implies j

I if η = 1 =⇒ constant returns to scale


I if η > 1 =⇒ increasing returns to scale
I if η < 1 =⇒ decreasing returns to scale

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Estimation of parameters of production function

I Commonly we want to estimate the parameters of the production


function and see how the relate to other things
I Pavcnik (2002) “Trade Liberalization Exit and Productivity Improvements:
Evidence From Chilean Plants” Review of Economic Studies

I Griffith, Harrison and Van Reenen (2006) “How Special Is the Special
Relationship? Using the Impact of U.S. R&D Spillovers on U.K. Firms as a
Test of Technology Sourcing” American Economic Review

I Criscuolo and Martin (2009) “Multinationals and U.S. Productivity


Leadership: Evidence From Great Britain” Review of Economics and Statistics

I De Loecker (2011) “Product Differentiation, Multi-Product Firms and


Estimating the Impact of Trade Liberalization on Productivity” Econometrica

I Topalova and Khadewal (2011) “Trade Liberalization and Firm Productivity:


The Case of India” Review of Economics and Statistics

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Estimation of parameters of production function
I Cobb-Douglas model
Qit = e α Lβitl Kitβk e uit

I i: firm, t: time (year)


I Qit : output of plant (or firm)
I might be in physical units, but often involves aggregation across
products measured in monetary value

I Lit : labour (or more generally a variable input)


I might include different types of labour (skilled, unskilled), and it might
include material, energy

I Kit : capital (a quasi-fixed input)


I uit : error term
I α, βl and βk : parameters to be estimated
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Econometric Issues

I Taking logs we obtain

ln(Qit ) = α + βl ln(Lit ) + βk ln(Kit ) + uit

I The error term, uit , includes:


I technology or management differences
I market power (particularly if Q measured in monetary value)
I variation in external factors (e.g., weather)
I measurement errors, etc.

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Econometric Issues

I There are several econometric issues we have to deal with


1. specification and functional form

2. data and potential measurement errors

3. selection

4. simultaneity (correlation between uit and K or L)

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Econometric Issues

I There are several econometric issues we have to deal with


1. specification and functional form
I we focus on Cobb Douglas (following much of the applied work)

I however very restrictive

I considerable work on more flexible functional forms

2. data and potential measurement errors

3. selection

4. simultaneity (correlation between uit and K or L)

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Econometric Issues
I There are several econometric issues we have to deal with
1. specification and functional form
2. data and potential measurement errors
I output (quality, prices, etc.)

I e.g. suppose we observe a cross section of firms; some have more


market power than others and so can charge a higher price; these firms
will produce more (monetary output) with less inputs, and we will
impute this to productivity

I labour (hours, skills, etc.)

I capital (usage, different types, depreciation, etc.)

I omitted inputs, prices, etc.

3. selection

4. simultaneity (correlation between uit and K or L)


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Econometric Issues

I There are several econometric issues we have to deal with


1. specification and functional form

2. data and potential measurement errors


3. selection
I firms observed in the market are not necessarily a random draw from
the population of interest

I this is especially problematic in panel data, where we observe firms over


time, and survival is not random

I this will introduce bias

4. simultaneity (correlation between uit and K or L)

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Simultaneity
I Observed inputs may be correlated with unobserved shock and
therefore OLS will yield biased and inconsistent estimates
I Suppose we observe a cross section of firms; some are more productive
(better managers); these firms might also need less labour to produce
the same output (and assuming they know this therefore hire less);
these firms will produce more with less labour, thus OLS will
underestimate βl
I Suppose we observe the same firms over time; in a period the firm gets
a higher productivity shock (which it observes) it will hire more labour;
OLS will attribute all the increase in output to the change in labour,
thus overestimating βl

I For most of what follows we will focus on the simultaneity of labour,


assuming capital is pre-determined; but related issue can arise with
capital

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Potential solutions to the Simultaneity Problem

I Some of the econometric solutions offered in the literature:


I Instrumental variables
I Fixed effects and first-differences
I General Method of moments (GMM)

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Instrumental variable (in a cross section)

I Look for a variable that is correlated with the variable input (labour)
and uncorrelated with the shock
I for example, input prices has been a favourite IV

I Problems:
I input prices might not be well observed
I they might not vary by firm (in a cross section this means this cannot
be used, in a panel structure basically become a time dummy)
I even if input prices vary by firm, why do they vary? the variation is
likely to be correlated with the error, for example due to market power
in input market or a matching process between firms and inputs

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Panel Data
I With panel data we see the same firm multiple times
I Assume
uit = αi + εit

I where αi is a firm specific shock, does not vary over time, and
accounts for all of the “problem”, and εit is idiosyncratic noise
I the firm specific effect is a parameter to be estimated
I only restriction is that it is fixed over time for each firm
I The fixed effects model can be estimated in several ways:
I estimate a dummy variable for each firm
I “within” transformation
I first differences

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Fixed Effects
I estimate a dummy variable for each firm
I “within” transformation

yit − y i = βl (lit − l i ) + βk (kit − k i ) + εit − εi

1
PT 1
PT 1
PT
I yi = T t=1 yit , li = T t=1 lit , ki = T t=1 kit
I OLS estimation of this equation will yield identical estimates to the
dummy variables approach, but will be easier to compute (and does not
suffer from the incidental parameters problem)
I α b i = y i − βl l i − βk k i
bi can be estimated by α

I First differences; estimate by OLS

yit − yit−1 = βl (lit − lit−1 ) + βk (kit − kit−1 ) + εit − εit−1

(and we can also use longer differences)


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Potential problems

I Is the part of the error that impacts input choice really fixed?
I if not the estimates might still be biased
I The “within” transformation
I reduces the signal to noise ratio, so measurement error will become
more of an issue and the estimates will be biased towards zero
(assuming classical measurement error)
I requires strict exogeneity; lit must be uncorrelated with εiτ for all t and
τ , since εi is in the error term

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General Method of Moments (GMM)
I Differencing gets rid of the additive firm-specific effect
I without measurement error and with strict exogeneity a “within”
transformation is more efficient than differencing
I however, if we worry about either measurement error or the strict
exogeneity assumption we could consider differencing the data
I To improve efficiency we can use several possible differences
I for example if T = 4 we have three first-differences, two
second-differences, one third difference
I which should we use? can we combine them?
I GMM is an easy way to combine the moments
I Griliches-Hausman (JOE, 1985) explore this and show that one can use
the different differences to learn about the effect of measurement error

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Dynamic Panel Methods

I The literature on dynamic panel data methods considers more


complex models that allow for the part of the error term that is
transmitted to inputs to vary over time
I Now simple differencing will not solve the simultaneity problem, so the
literature uses the structure of the panel to generate Instrumental
Variables
I Arellano and Bond (1991)
I Blundell and Bond (2000)

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Arellano and Bond

I Assume that uit = αi + ωit + εit


I where αi and ωit are “transmitted”, i.e they have an impact on the
firm’s choice of lit
I ωit is not autocorrelated

I taking differences we get

yit −yi,t−1 = βl (lit −li,t−1 )+βk (kit −ki,t−1 )+(ωit −ωi,t−1 )+(εit −εi,t−1 )

I the difference (ωit − ωi,t−1 ) is in the error term and is correlated with
(lit − li,t−1 )
I therefore we need an instrumental variable

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Arellano and Bond

I Arellano and Bond (1991) suggest using lagged values of output and
the inputs as IV
I use lit−τ and kit−τ , for τ ≥ 2
I we could also consider using lagged values of the outputs
I yit−τ for τ ≥ 2, and depending on the assumptions on how and when
capital is chosen kit and kit−1 , as additional IVs

I The estimation is based on the conditional moment

E uit − ui,t−1 | (liτ , kiτ )t−2


 
τ =1 = 0

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Arellano and Bond

I Problems:
I this approach has performed poorly both with real data and in Monte
Carlo studies
I seems that lagged values are weak instruments for the differences
I the assumption that ωit is not autocorrelated seems strong

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Blundell and Bond
I To deal with the weak IV problem Blundell and Bond (2000) propose
additional moment conditions
I in addition to lagged levels as insturments for differences
I use lagged differences of the inputs (i.e., lit−1 − li,t−2 , and
kit−1 − ki,t−2 ) as instruments for the levels equation
I this is justified if we assume
h i
t−2
E uit | {liτ − liτ −1 , kiτ − kiτ −1 }τ =2 = 0

I In words:
I we assume that the level of past inputs is not a valid IV (since it will
depend on αi ),

I but that past changes in inputs are valid (since they were driven by
realizations of past ω and ε)

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Blundell and Bond

I Combining the “levels as IVs for difference equations” moments with


the “differences as IVs for levels equations” yields what is often called
the “system GMM”
I These IVs are likely to be powerful
I because there are adjustment costs and the current level of the inputs
will likely depend on past levels, which are a summation of past changes

I System GMM typically has better, more stable, performance than just
relying on either of the moments separately
I However, if there are adjustment costs then why aren’t firms forward
looking
I in which case if they can (partially) predict future ω and ε, and the
moment condition used will be violated

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Blundell and Bond
I Can be extended to deal with serial correlation in ωit
I uit = αi + ωit + εit , where αi and ωit are “transmitted”
I assume ωit = ρωit−1 + vit follows an AR(1) process
I use yiτ , li,t−τ and ki,t−τ , for τ ≥ 3 as IV for the (quasi-difference)
equation
(yit − ρyi,t−1 ) − (yit−1 − ρyi,t−2 ) = βl ((lit − ρli,t−1 ) − (lit−1 − ρli,t−2 ))
+ βk ((kit − ρki,t−1 ) − (kit−1 − ρki,t−2 ))
+ ε∗it

where

ε∗it = vit − vit−1 + (εit − ρεi,t−1 ) − (εit−1 − ρεi,t−2 )

I The estimation is based on the conditional moment

E ε∗it | (yiτ , liτ , kiτ )t−3


 
τ =1 = 0

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A ”Structural” Approach

I One of the main problems with the dynamic panel data approach is
that the setup is mostly statistical in nature
I there is little connection to economic modeling

I An alternative approach that is more closely tied to economic theory,


and therefore often considered more ”structural”, is offered by
Olley-Pakes
I This approach has a lot in common with the dynamic panel methods

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A ”Structural” Approach

I Motivation came from dissatisfaction with the problems we discuss in


last lecture
I to allow for input endogeneity with respect to a time varying
unobservable, not just pure fixed effect approaches
I allow for subsets of inputs to be dynamic in nature, but don’t have to
get explicit solution of complicated dynamic first order conditions
related to those inputs
I do not require the econometrician to observe exogenous, across-firm
variation in input prices, as is required with the IV based approaches
(usually relying in variation in input prices)

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A ”Structural” Approach

I Olley-Pakes identified conditions under which firm-level investment


(conditional on capital stock) is a strictly increasing function of a
scalar, firm-level, unobserved productivity shock
I This strict monotonicity implies that one can invert this investment
demand function, and thus control for the unobserved productivity
shock by conditioning on a nonparametric representation of that inverse
function

I Levinson-Petrin used a similar approach, but inverted an intermediate


input demand function instead of an investment demand function to
control for the unobserved productivity shock

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A ”Structural” Approach

I Ackerberg-Caves-Frazer:
I provide a clearer exposition of some of the potentially strong other
assumptions that need be made for this approach to work
I e.g. similarities in the environments that different firms face

I whas in firms information sets when different inputs are chosen

I limits to the form and extent of unobserved heterogeneity across firms

I propose some (minor) variations that avoid some empirical problems


with approach

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The Olley-Pakes model

I Model
yit = α + βl lit + βk kit + ωit + εit
where
I y : log of output
I l: log of labour inputs
I k: log of capital inputs
I ωit is transmitted into the labor choice, unobserved
I εit is white noise
I α, βl , βk are parameters to be estimated

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The Olley-Pakes model

I Assumption 1 (first-order Markov):


Productivity shocks evolve according to the distribution
P(ωit | Iit−1 ) = P(ωit | ωit−1 ),
where Iit−1 is the firm’s information set at time t − 1
I firms do not observe the shock ωit until t, the distribution p(ωit+1 |ωit )
defines what they know about the distribution of future productivity
shocks
I this assumption is more general than the linear AR(1) typically assumed
in the dynamic panel literature
I however, it rules out higher order persistence, for example as in Arellano
and Bond, where the shock includes a firm “fixed” effect

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The Olley-Pakes model
I Assumption 2 (timing):
I labour is choosen at t and is a non-dynamic input, the choice of labour
at time t does not impact future profits)
I capital is choosen at t − 1 and the choice is dynamic and evolves
according to
kit = K (kit−1 , iit−1 )
where K () is a deterministic function and iit−1 is investment at time
t −1
I implies that period-t capital stock of the firm was determined at t 1;
i.e. it takes a full period for new capital to be ordered, delivered, and
installed

I this assumption is important in generating the moment conditions used


for estimation

I the second part of the assumption (together with Assumption 1) implies


that ωit − E (ωit | Iit−1 ) = ωit − E (ωit | ωit−1 ) is not correlated with kit
(since iit−1 is determined at t − 1)
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The Olley-Pakes model
I Assumption 3 (scalar unobservable and strict monotonicity):
firms’ investment decision are given by

iit = ft (ωit , kit )

and ft (ωit , kit ) is strictly increasing in ωit


I says that investment is a function of the state variables kit , ωit , but lit is
not a state variable because it is non-dynamic and chosen at t
I Griliches and Mairesse (1998) noted that this places strong implicit
restrictions on additional firm-specific econometric unobservables in the
model; e.g. rules out any unobserved heterogeneity across firms in
adjustment costs of capital, in demand or labour market conditions, or
additional unobservables entering other parts of the production function
I indexing f () by t allow differences in these variables across time

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The Olley-Pakes model

I Labour is non-dynamic so it does not enter the investment function


I Only ωit , no other unobserved shocks, enter the function
I an example of such shocks are firm specific input prices (or a firm
“fixed” effect)

I f is indexed by t to allow for changes in market conditions (e.g., the


macro economy) that change over time and impact all firms

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Olley-Pakes
I Assumption 3 allows us to invert the investment decision to recover
the unobservable:
ωit = ft−1 (iit , kit )

I So if we knew ft−1 , we could control for ωit

yit = α + βl lit + βk kit + ft−1 (iit , kit ) + εit


≡ βl lit + φt (iit , kit ) + εit

I We do not know ft−1


I we would need to solve a fairly complex dynamic problem in order to
get it
I but we can estimate ωit non-parametrically

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Estimation of Olley-Pakes
I Step 1 (recovering β̂l and φ̂it )
I Estimate βl by regressing yit on lit and a non-parametric approximation
of φt (i.e. polynomial expansion in argument of φt )

I Step 2 (recovering β̂k )


I note that

ωit = E (ωit | Iit−1 ) + ξit = E (ωit | ωit−1 ) + ξit

where ξit is the unexpected innovation in ωit ; the second equality


follows from Assumption 1
I by construction E (ξit | Iit−1 ) = 0, which combined with Assumption 2
implies that
E (ξit | kit ) = 0

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Summary of Olley-Pakes

I In summary, we identified
I βl by controlling for ωit using the investment decision, which brought in
new information
I investment is closely related to the change in capital, so in some ways
this parallels the ideas in using lagged differences to estimate a levels
equation employed in the dynamic panel literature
I the difference is that here the lagged difference are used as a “control
function” of sorts
I βk is identified off of the timing decisions
I which very much parallels the ideas in using past levels to identify a
(quasi) difference equation in the dynamic panel literature

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Summary of Olley-Pakes

I We discussed as if estimation is done in two steps, in reality this can


be done in one step, stacking up all the moments
I Note, the model in the Olley-Pakes paper is more general in two ways:

I they include age in the model; does not change much


I they allow for selection, which depends on ωit ; this adds a step,
between Step 1 and 2, where the probability of exit is estimated
non-parametrically

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Levinsohn-Petrin

I Extend Olley-Pakes
I Note that investment tends to be lumpy
I In particular many observations with iit = 0
I For these observations ft is not strictly increasing and cannot be
inverted
I In principle, the OP approach can still work but it requires that we
ignore all the observations with iit = 0, which could mean ignoring a
lot of data
I Levinsohn-Petrin propose to modify the OP approach

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Levinsohn-Petrin
I They consider
yit = α + βl lit + βk kit + βm mit + ωit + εit

I where mit are intermediate inputs like material, fuel or electricity


I assume that mit = ft (ωit , kit ) and the ft is invertible
I Therefore
ωit = ft−1 (mit , kit )

I The estimation follows Olley-Pakes very closely


I In Step 1, regress yit on lit and a non-parametric estimate of
φt (mit , kit ), get βbl and φ
cit

I In Step 2 exploit the conditional moment condition:


E (ξit (βk , βm ) | kit , mit−1 ) = 0

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Levinsohn-Petrin

I Comments:
I Nice idea to bring in more proxies
I Why is ft nonparametric? Unlike Olley-Pakes we do not need a dynamic
model to specify it
I Given the production function and assumptions about input and output
prices it could be specified (recent papers do this, e.g. Gandhi et al)
I In some sense no new information - what is unique about mit ? Why
couldn’t we use labour?

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Ackerberg-Caves-Frazer
I Worried about “colinearity” issues
I Consider Step 1 in Levinsohn-Petrin

yit = βl lit + φt (mit , kit ) + εit

I The question is why (in the model) will lit vary independently of
φt (mit , kit )?
I they vary independently when we estimate the model (otherwise, we
could not get first stage estimates)

I but the question is, is this real variation or just a function of us not
allowing for a general enough function for φt (or of the model being
mis-specified)

I A-C-F consider various options on timing

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Ackerberg-Caves-Frazer

I Option 1: lit chosen at the same time as mit


I in this case given the way we described mit we can write

lit = gt (ωit , kit ) = gt (ft−1 (mit , kit ), kit ) = ht (mit , kit )

I No independent variation in lit

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Ackerberg-Caves-Frazer

I Option 2: lit chosen either before or after mit (and ωit evolves
between the choices)
I if lit is chosen after mit , we will get variation in lit (because in includes
additional information), but inverting mit will not recover the correct
productivity shock
I if lit is chosen before mit , then mit = ft (lit , ωit , kit ) and we will not get
the required variation

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Ackerberg-Caves-Frazer

I Option 3: A couple of assumptions that might work


I measurement error in lit , but not in mit will generate the required
variation and still allow the inversion to recover the productivity shock
(note that we need no measurement error in mit for the inversion to
work)
I lit is chosen after mit , ωit does not evolves between the choices, and
there is an additional unexpected error that impacts the choice of labour
I these last two alternatives will work but are very specific and it is not
clear we want to build on them to justify the procedure
I similar issues exist in Olley-Pakes, but there the assumptions required
to justify the procedure are easier to believe

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Ackerberg-Caves-Frazer

I Alternative method
I In addition to pointing out the problem, A-C-F offer an alternative
method (they actually offer more than one, this is the main one)
I Consider the value added production function:

yit = α + βl lit + βk kit + ωit + εit

I The timing is as follows:


I iit (and kit ) set at time t − 1

I lit set at time t − b, 0 < b < 1

I mit set at time t and then production occurs

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Ackerberg-Caves-Frazer

I The productivity shocks evolves according to


P(ωit | Iit−b ) = P(ωit | ωit−b ) and P(ωit−b | Iit−1 ) = P(ωit−b | ωit−1 )
I Given the timing, materials are determined by mit = ft (lit , ωit , kit ),
and ft is invertible
I Therefore:

yit = α + βl lit + βk kit + ft−1 (lit , mit , kit ) + εit

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Ackerberg-Caves-Frazer

I The estimation is in two steps


I Step 1, regress yit on a non-parametric function of lit , kit and mit
I unlike before no parameters are estimated only φ cit is recovered
(basically the whole purpose of this step is to net out εit )

I Step 2, estimate the coefficients βl and βk using the conditional


moment
E (ξit (βl , βk ) | kit , lit−1 ) = 0

I as before ξit = ωit − E (ωit | ωit−1 )

I The advantage of this approach is that it makes assumptions about


the timing that seem reasonable and are consistent with the estimation

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Ackerberg-Caves-Frazer Monte Carlo results

I Ackerberg-Caves-Frazer show a series of Monte Carlo results that


show that their approach does better, and is more robust to certain
forms of measurement error, than Olley-Pakes and Levinsohn-Petrin
I However, none of these consider a data generating process with a
fixed effect
I In practice, a big difference in estimates is in the coeffcient on capital,
which varies a lot between estimates based on fixed effects models and
those based on Olley-Pakes style models

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Olley-Pakes results

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Pavcnik results

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Comparison of Pavcnik with fixed effects results

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Final Comments

I Comparison to the dynamic panel literature


I OP/LP/ACF allow for general first order process (not just a linear
AR(1))
I dynamic panel approach can allow for a fixed effect in addition to the
AR(1) process (i.e., more persistence in the productivity shock), while
OP/LP/ACF cannot
I if a fixed-effect exists the moment condition used in the second step
would not be valid

I dynamic panel approach does not require scalar unobservable or


monotonicity condition

I It’s a trade off, which is better will depend on the application

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