Theory and Practice of TFP Estimation: the Control Function Approach Using Stata

Mollisi VincenzoRovigatti Gabriele
CEIS Research Paper
Alongside Instrumental Variable (IV) and Fixed Effects (FE), the Control Function (CF) approach is the most widely used in production function estimation. Olley-Pakes, Levinsohn-Petrin, Ackerberg-Caves-Frazer have all contributed to the literature proposing two-steps estimation procedures, while Wooldridge showed how to perform a consistent estimation within a single step GMM framework. In this paper we propose a new estimator, based on Wooldridge's, using dynamic panel instruments à la Blundell-Bond and we evaluate its performance by Monte Carlo simulations. We also present a new Stata module - prodest - for production function estimation, show its main features and key strengths in a comparative analysis with other available user-written commands. Lastly, we provide evidence of the numerical challenges faced when using OP/LP estimators with ACF correction in empirical applications and document how the GMM estimates vary depending on the optimization/starting points used.

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Number: 399
Keywords: production functions, productivity, prodest, MrEst, dynamic panel GMM.
Volume: 15
Issue: 2
Date: Tuesday, February 14, 2017
Revision Date: Tuesday, February 14, 2017