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constant and the logarithm of labor and capital produce

parameter estimates of a Cobb-Douglas production function.

! The following Table provides the results of our estimating a

Cobb-Douglas production function:

lnY lnL lnK (t =1, 2, ...,27)

0 1 t 2 t

e

t t

+ + +

Estimated Cobb-Douglas Production Function

No. of

Obs.=27

=

u

0.1884

R

2

= 0.9435

Adj. R

2

=

0.9388

eNe =

0.85163

Variable Coefficient Std. Error T-Ratio

Intercept 1.1706 0.3268 3.5823

LN(Lab) 0.6030 0.1260 4.7875

LN(K) 0.3757 0.0853 4.4022

Estimated Covariance Matrix

Intercept 0.10680

LN(Lab) -0.01984 0.01586

LN(K) 0.00189 -0.00961 0.00728

! For testing the hypothesis that the j

th

coefficient is equal to a

particular value, , the matrix R has a single row, r with a 1

0

j

in the j

th

position. Thus R(XNX)

-1

RNis the j

th

diagonal element

of the inverse matrix. The resulting F-Statistic is:

O 2

1,T-K jS j jS

F ( ) Est.Var( )

which is the square of the t-statistic with (T-K) degrees of

freedom.

! Lets test the null hypothesis that the output elasticity of labor

equals 1, H

0

: .

1

1

! The following F-Statistic is obtained:

F

1,2

= (0.6030 - 1)

2

/(0.0156) = 9.937.

The 5% critical value is 4.26 . We therefore reject the null

hypothesis.

! For testing a single linear restriction of the for H

0:

the

r* q

F-statistic is:

( )

( )

( )

2

*

2 j jS

1,T-K

* *

j k jS kS

1 1

r q

r* - q

F

r* r*

r r Est.Cov.

S

j

K K

j k

| `

. ,

where r* is (1 x K) and r

j

*

is the j

th

coefficient and the

S

! The hypothesis of constant returns to scale is equivalent to the

null hypothesis that the sum of labor and capital coefficients

equals 1.

! From the above results, we have:

( )

2

1,24

0.6030 + 0.3757 - 1

F 0.1157

(0.01586 + 0.00728 + 2(-0.00961)

This is substantially less than the critical F-value of 4.26 .

We would not reject the null hypothesis. That is, the data are

consistent with the hypothesis of constant returns to scale.

Estimation of the Translog Production Function

! A generalization of the Cobb-Douglas estimated above is the

translog model which can be represented by the following:

( )

( )

( )

0 1 t 2 t

t

4 5

2

lnY lnL lnK 1 / 2 ln L

2

1/ 2 ln K lnL lnK (t =1, 2, ...,27)

3 t

t t t

t

t

e

+ + + +

+ +

! This model differs from the Cobb-Douglas model in that it

relaxes the assumption of unitary elasticity of substitution.

Note the Cobb-Douglas model is obtained by the restriction:

3 4 5

0

! The F-statistic for the hypothesis of a Cobb-Douglas model

can be obtained using the general F-statistic we reviewed in

class when we have multiple linear restrictions on the

parameters using the formula:

1 1

J, T-K

2

(R ) [R( ' ) R'] (R )

F

J

O O

S S

u

X X

production function represents a restricted regression that

imposes that above parameter restrictions. It can be shown

that the above F-statistic can be calculated via the following:

R R S S

J, T - K

2

e e

F

- e e

J

u

where e

R

Ne

R

is the sum of squared errors from the restricted

regression which in our example is the Cobb-Douglas

production function.

! The following table provides the results of estimating the

translog production function regression model:

Estimated Translog Production Function

No. of

Obs.=27

=

u

0.1799

R

2

= 0.9549

Adj. R

2

=

0.9441

eNe =

0.67993

Variable Coefficient Std. Error T-Ratio

Intercept

0.9442 2.9108 0.3244

LN(L)

3.6136 1.5481 2.3343

LN(K)

-1.8931 1.0163 -1.8628

LN

2

(L)

-0.9641 0.7074 -1.3628

LN

2

(K)

0.0853 0.2926 0.2915

LN(L)*LN(K)

0.3124 0.4389 0.7117

! The resulting F-statistic for the null hypothesis of a Cobb-

Douglas model is:

3,21

0.85163 - 0.67993

1.768

3 (0.03238)

F

The critical value from the F table is 3.07, so we could not reject

the hypothesis of a Cobb-Douglas model.

! Note the coefficient on lnK is now negative. This does not mean

that the estimated output elasticity with respect to capital has

the wrong sign.

# 2 4 5

lnY

lnK + l nL

lnK

and lnL (not the log of the means) of 7.4459 and 5.7637,

the above partial is 0.5425.

# Estimated variance for this linear combination of the least

squares estimates is computed as:

2 4 5

Est. Var ln K + l nL w w 0.01259

S

]

+

]

where is the full

( )

w = 0 0 1 0 ln K ln L and

S

# At the mean values, the above results imply that the

hypothesis that the marginal impact of K on output is non-

positive is rejected (t = 0.5425/0.1122).

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