Identification Properties of Recent Production Function Estimators

Abstract

This paper examines some of the recent literature on the estimation of production functions.We focus on techniques suggested in two recent papers, Olley andPakes (1996), andLevinsohn andPetrin (2003).While there are some solid and intuitive identification ideas in these papers, we argue that the techniques can suffer from functional dependence problems.We suggest an alternative approach that is based on the ideas in these papers, but does not suffer from the functional dependence problems and produces consistent estimates under alternative data generating processes for which the original procedures do not.