Arguing a Case for Cobb-Douglas Production Function

Abstract

The paper argues that Cobb-Douglas (CD) production function merits use for analyzing the production process, not because it should be looked upon as a simple tool which can be handled easily or as a crude remedy for estimation, but because of the advantages it possesses. These advantages are due to the fact that it can handle multiple inputs in its generalized form. Even in the face of imperfections in the market, it does not introduce distortions of its own. Unconstrained CD-function further increases its potentialities to handle different scales of production. Various econometric estimation problems, such as serial correlation, heteroscidasticity and multicolinearity can be handled adequately and easily. It is argued that most of its criticism is focussed on its inflexibility and admits that except for one obvious assumptions all other assumptions can be relaxed. It is further argued that it facilitates computations and has the properties of explicit representability, uniformity, parsimony and flexibility. Even the problem of simultaneity can be overcome. The paper argues that aggregate technology can also be well represented by it.

Keywords: Production function, functional form

JEL Classification: C13, D24