On Empirical Estimation of the Production Function under
Imperfect Capital Markets
May 2009 (Revised: June 2009)
Abstract
An econometric approach to estimate the production function by Olley and Pakes (1996) is widely used in empirical works. One drawback in the Olley-Pakes approach is that the capital market is assumed to be perfect and that its estimators become inconsistent when the capital market is imperfect. Many empirical researches indicate that the capital markets are imperfect not only in developing countries but also in the developed countries. This paper extends the Olley-Pakes approach so that the estimators become consistent and robust even under the imperfect capital markets. Empirical results based on the Japanese firms' data via our extended Olley-Pakes approach confirm the existence of estimation biases such that the original Olley-Pakes underestimates 8-43% in capital coefficients. That is not negligible.
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