Title

Production risk and the estimation of ex-ante cost functions

Campus Units

Economics, Center for Agricultural and Rural Development

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

2-2001

Journal or Book Title

Journal of Econometrics

Volume

100

Issue

2

First Page or Article ID Number

357

Last Page

380

DOI

10.1016/S0304-4076(00)00041-5

Abstract

Cost function estimation under production uncertainty is problematic because the relevant cost is conditional on unobservable expected output. If input demand functions are also stochastic, then a nonlinear errors-in-variables model is obtained and standard estimation procedures typically fail to attain consistency. But by exploiting the full implications of the expected profit maximization hypothesis that gives rise to ex-ante cost functions, it is shown that the errors-in-variables problem can be effectively removed, and consistent estimation of the parameters of interest achieved. A Monte Carlo experiment illustrates the advantages of the proposed procedure as well as the pitfalls of other existing estimators.

JEL Classification

C13, C39, D24

Comments

This is a working paper of an article from Journal of Econometrics 100 (2001): 357, doi: 10.1016/S0304-4076(00)00041-5.