Production Function Estimation and Capital Measurement Error

45 Pages Posted: 25 Jul 2016 Last revised: 23 Apr 2023

See all articles by Allan Collard-Wexler

Allan Collard-Wexler

Duke University

Jan De Loecker

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2016

Abstract

We look into the impact of measurement error in capital on the estimation of production functions. We introduce an identification scheme and an estimation procedure that jointly deals with measurement error in capital and the standard simultaneity bias due to unobserved productivity shocks. We use lagged investment to instrument for potentially mis-measured capital stock, while conditioning on the part of productivity that is persistent. Our estimation routine nests standard approaches in the literature, such as Ackerberg, Caves, and Frazer (2015). It requires no additional data as investment is usually collected with other producer level data. We show through Monte-Carlo experiments that a 40 percent measurement error in capital yields capital coefficients that are biased downward by a factor of two. We illustrate our approach using data for three distinct economies: China, India and Chile; which experienced radically different processes of capital and productivity dynamics. We find capital coefficients that are typically two times larger than those using standard approaches that only control for simultaneity.

Suggested Citation

Collard-Wexler, Allan and De Loecker, Jan, Production Function Estimation and Capital Measurement Error (July 2016). NBER Working Paper No. w22437, Available at SSRN: https://ssrn.com/abstract=2813885

Allan Collard-Wexler (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Jan De Loecker

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://pages.stern.nyu.edu/~jdeloeck/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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