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Lee study on Olley and Pakes-style production function estimators published in Oxford BES

Sep 11, 2018

Olley and Pakes-style Production Function Estimators with Firm Fixed Effects

Yoonseok Lee, Andrey Stoyanov & Nikolay Zubanov

Oxford Bulletin of Economics and Statistics, September 2018

Yoonseok Lee

Yoonseok Lee

The authors show that control function estimators (CFEs) of the firm production function, such as Olley–Pakes, may be biased when productivity evolves with a firm-specific intercept, in which case the correctly specified control function will contain a firm-specific term, omitted in the standard CFEs. They develop an estimator that is free from this bias by introducing firm fixed effects in the control function. Applying their estimator to the data, they find that it outperforms the existing CFEs in terms of capturing persistent unobserved heterogeneity in firm productivity. The authors' estimator involves minimal modification to the standard CFE procedures and can be easily implemented using common statistical software.