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Production Functions

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Production and Efficiency Analysis with R

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Abstract

Production functions postulate a functional relation between inputs and output. In the economic literature three production functions seem to play a dominant role: The Cobb–Douglas production function, the constant elasticity of substitution function, and the transcendental logarithmic production function. In this chapter, we provide a short discussion of their theoretical properties. Overlaying the deterministic output with a random error, we show how to generate artificial data according to the production functions and demonstrate how to estimate the parameters of the different production functions.

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Notes

  1. 1.

    To obtain the relative price of labor and capital the amounts of labor and capital are taken as given. But the aggregation of capital itself already rests on relative prices of capital. The famous Cambridge controversy focused on the question whether capital intensity would monotonically increase with a decreasing relative price of capital (no reswitching). During the debate it has been clarified that reswitching cannot be ruled out: “We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false. We are grateful to Dr. Pasinetti …” Levhari and Samuelson (1966).

  2. 2.

    In this case the residual sum of squares equals the negative partial log-likelihood if assuming normal error terms up to a scaling factor.

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Authors and Affiliations

  1. Faculty of Business Administration and Economics, University of Duisburg-Essen, Essen, Germany

    Andreas Behr

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  1. Andreas Behr
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Behr, A. (2015). Production Functions. In: Production and Efficiency Analysis with R. Springer, Cham. https://doi.org/10.1007/978-3-319-20502-1_3

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