Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300425 
Year of Publication: 
2024
Series/Report no.: 
cemmap working paper No. CWP15/24
Publisher: 
Centre for Microdata Methods and Practice (cemmap), London
Abstract: 
Standard methods for estimating production functions in the Olley and Pakes (1996) tradition require assumptions on input choices. We introduce a new method that exploits (increasingly available) data on a firm's expectations of its future output and inputs that allows us to obtain consistent production function parameter estimates while relaxing these input demand assumptions. In contrast to dynamic panel methods, our proposed estimator can be implemented on very short panels (including a single cross-section), and Monte Carlo simulations show it outperforms alternative estimators when firms' material input choices are subject to optimization error. Implementing a range of production function estimators on UK data, we find our proposed estimator yields results that are either similar to or more credible than commonly-used alternatives. These differences are larger in industries where material inputs appear harder to optimize. We show that TFP implied by our proposed estimator is more strongly associated with future jobs growth than existing methods, suggesting that failing to adequately account for input endogeneity may underestimate the degree of dynamic reallocation in the economy.
Subjects: 
Expectations
Production Functions
Productivity
Input demand
JEL: 
L11
L23
C23
C21
O31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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