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Lecture 05-2005

# Lecture 05-2005 - Estimation of the Primal Production...

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Estimation of the Primal Production Function Lecture V

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Ordinary Least Squares The most straightforward concept in the estimation of production function is the application of ordinary least squares. 2 0 1 1 2 2 3 3 11 1 12 1 2 2 2 13 1 3 22 2 23 2 3 33 3 y a a x a x a x A x A x x A x x A x A x x A x ε = + + + + + + + + + +
Note that we have already applied symmetry on the quadratic. From an estimation perspective, since x 1 x 2 = x 2 x 1 any other approach would not work. Using data from Indiana and Illinois, we apply ordinary least squares to this specification to estimate

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Do these estimates make any sense? What is wrong? Turning to the Cobb-Douglas form ( 29 ( 29 ( 29 ( 29 ( 29 1 2 3 1 2 3 ln ln ln ln ln y Ax x x y A x x x α β γ α β γ = = + + + ( 29 ( 29 ( 29 ( 29 0 1 1 2 2 3 3 ln ln ln ln y x x x α α α α ε = + + + +
What are some of the problems with this specification? First, the one problem is that there may be zero input levels. What is the production theoretic problem with zero input levels? What is the econometric problem with zero input levels?

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