Comment on “Olley and Pakes‐style Production Function Estimators with Firm Fixed Effects”*
| Published date | 01 June 2021 |
| Author | Daniel A. Ackerberg |
| Date | 01 June 2021 |
| DOI | http://doi.org/10.1111/obes.12406 |
836
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 83, 3 (2021) 0305–9049
doi: 10.1111/obes.12406
Comment on “Olley and Pakes-style Production
Function Estimators with Firm Fixed Effects”*
Daniel A. Ackerberg†
†Deprtment of Economics, University of Texas at Austin,Austin, 78712-1139, USA
(e-mail: daniel.ackerberg@gmail.com)
Abstract
In this comment I illustrate that in the model of (Lee et al. (2019). Oxford Bulletin of
Economics and Statistics. Vol. 81, pp. 80–97), firm profit maximizing implies that As-
sumption 2 and Equation 14 may be contradictory. More specifically, there is generally a
contradiction when investment is used as the control variable, but there is generally not a
contradiction when a static input like material input is used as the control variable (both
types of control variables are discussed in Lee et al.). While the Lee et al. model and
techniques are an interesting way to incorporate fixed effects into Olley and Pakes-style
production function estimators, this observation suggests that their application should be
restricted to cases where static inputs are used as control variables.
The general method for estimating production functions proposed by Olley and Pakes
(1996), henceforth OP, allows the unobserved productivity shock to follow a very general,
potentially non-parametric, first order Markov process. However, the basic OP approach
does not permit a firm fixed effect component of that shock. Lee, Stoyanov and Zubanov,
(2019), henceforth LSZ, consider extending OP (and related work, e.g. Levinsohn and
Petrin (2003), henceforth LP, Ackerberg, Caves and Frazer (2015), henceforth ACF to
additionally allow for such firm fixed effects.This is an important potential extension
because an alternative to the OP approach – the ‘dynamic panel’ approach of Blundell and
Bond (2000) – does allow for fixed effects in the production function (although, unlike
OP related methods, it restricts the Markov process to be linear). Thus, if the OP approach
could be generalized to allow fixed effects,this generalization could be thought of as a way
to combine beneficial aspects of both the OP and ‘dynamic panel’ approaches.1This note
argues that while the LSZ approach succeeds in doing this in some cases, the model and
techniques should be restricted to cases where static inputs (rather than dynamic inputs)
are used as control variables.
*Thanks for helpful comments from the co-editor, an anonymous referee, Yeonsook Lee, AndreyStoyanov, and
Nikolay Zubanov. All errors are my own.
1SeeACF and Ackerberg (2020) for more discussion of the similarities and differences in the required assumptions
for the two approaches.
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