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On the non-identification of revenue production functions

Author

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  • van Dijcke, David

    (University of Michigan)

Abstract
It is well‑known that production functions are potentially misspecified when revenue is used as a proxy for output. In this paper, I formalise and strengthen this common knowledge by showing that neither the production function nor Hicks‑neutral productivity can be identified when revenue is used as a proxy for physical output. This result holds under the standard assumptions used in the literature for a large class of production functions, including all commonly used parametric forms. Among the prevalent approaches to address this issue, I show that only those which impose assumptions on the underlying demand system can possibly identify the production function.

Suggested Citation

  • van Dijcke, David, 2023. "On the non-identification of revenue production functions," Bank of England working papers 1015, Bank of England.
    • Handle: RePEc:boe:boeewp:1015
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    More about this item

    Keywords

    Production function estimation; revenue production functions; productivity; market power; identification;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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