Estimating production functions with robustness against errors in the proxy variables

Abstract

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Monopsony in the US Labor Market

“…In particular, we adopt data-generating processes from Ackerberg, Caves and Frazer (2015) that are inconsistent with the econometric assumptions of the family of proxy variable estimators. Nevertheless, as we show in Onlne Appendix O.5.3, our preferred translog estimator outperforms several estimators that do not rely on the scalar unobservable assumption, including those from Blundell and Bond (2000) and Hu, Huang and Sasaki (2020). Hence, even though the scalar unobservable assumption is violated, we do not believe it causes significant problems in practice.…”

“…22 We should note that our measures of output and inputs are based on deflated expenditures. While we show that markdowns can be obtained even if only (deflated) revenue elasticities can be estimated (see Section 5), the absence of input prices does technically violate the scalar unobservable assumption (see Hu, Huang and Sasaki, 2020;Bond et al, 2021). However, this issue does not seem to be a major concern in practice, as we summarize in the "Scalar unobservable assumption" subsection of Section 5.…”

“…In the following, we evaluate a set of proxy variable estimators and two estimators that do not rely on the scalar unobservable assumption. Regarding the latter two, we use the dynamic panel IV estimator from Blundell and Bond (2000) and the estimator from Hu, Huang and Sasaki (2020). To evaluate the performance of all estimators, we apply them to simulated data.…”

“…However, the latter does not affect our results much and is without much loss of generality. We also focus on the estimator of Hu, Huang and Sasaki (2020). It is commonly assumed that labor is chosen simultaneously with material inputs.…”

Accounting for cross‐location technological heterogeneity in the measurement of operations efficiency and productivity

“…However, the second‐step equation (3.11) will have a new endogeneity issue due to the measurement error. In such a case, additional identifying assumptions are often needed; see Hu et al (2020) for an example.…”