Campus Units

Economics

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

4-2019

Journal or Book Title

American Journal of Agricultural Economics

Volume

101

Issue

3

First Page or Article ID Number

825

Last Page

848

DOI

10.1093/ajae/aay071

Abstract

The Neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology. This relationship, commonly referred to as duality theory, has been widely used in empirical work to estimate production parameters, such as elasticities and returns to scale, without the requirement of explicitly specifying the parametric form of the production function. We generate a pseudo-dataset by Monte Carlo simulations, which starting from known production parameters, yield a dataset with the main characteristics of U.S. agriculture in terms of unobserved firm heterogeneity, decisions under uncertainty, unexpected production and price shocks, endogenous prices, output and input aggregation, measurement error in variables, and omitted variables. Production parameters are not precisely recovered when performing econometric estimation based on the duality approach, and the elasticity estimates are inaccurate. Deviations of own- and cross-price elasticities from initial median values, given our parameter calibration, range between 6% and 229%, with an average of 71%. Also, own-price elasticities are as imprecisely recovered as cross- price elasticities. Sensitivity analysis shows that results still hold for different sources and levels of noise, as well as sample size used in estimation.

JEL Classification

C18, D22, D81, Q12

Comments

This is a manuscript of an article published as Rosas, Francisco, and Sergio H. Lence. "How reliable is duality theory in empirical work?." American Journal of Agricultural Economics 101, no. 3 (2019): 825-848. doi: 10.1093/ajae/aay071. Posted with permission.

Copyright Owner

The Authors

Language

en

File Format

application/pdf

Available for download on Thursday, April 01, 2021

Published Version

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