A Note on the Importance of Testing for Regularities for Estimated Flexible Functional Forms

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Abstract

In empirical productivity analysis it has become customary to use flexible functional forms to represent a firm's production technology by estimating cost functions. In this note we suggest a procedure to calculate the region where an estimated translog cost function meet the required regularities (positive cost, positive marginal cost, homogeneous, monotonicity and concavity in input prices). We calculate this region for the US Bell cost function as reported by Evans and Heckman (1984, 1986), and show that the estimated cost function had negative marginal cost in most of the test region.

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