| Sumario: | A major econometric issue in estimating production parameters and technical efficiency is the
possibility that some forces influencing production are only observed by the firm and not by
the econometrician. Not only can this misspecification lead to a biased inference on the output
elasticity of inputs, but it also provides a faulty measure of technical efficiency. We extend the
Levinsohn and Petrin (2003) approach and provide an estimation algorithm to overcome the
problem of endogenous input choice in stochastic production frontier estimation by generating
consistent estimates of production parameters and technical efficiency. We apply the proposed
method to a plant-level panel dataset from the Colombian food manufacturing sector for the
period 1982–1998. This dataset provides the value of output and prices charged for each product,
expenditures, and prices paid for each material used, energy consumption in kilowatt per hour and
energy prices, number of workers and payroll, and book values of capital stock. Empirical results
find that the traditional stochastic production frontier tends to underestimate the output elasticity
of capital and firm-level technical efficiency. The evidence in this research suggests that addressing
the endogeneity issue matters in stochastic production frontier analysis.
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