Description: Labor-Public Applied Economics Workshop

Presenter: Jibin Jose

Location: 368A Heady Hall

Title: Conflicting Markup Estimates and Cost Minimization: The Semi-Nonparametric Translog Model" (joint with GianCarlo Moschini)

Abstract: The production function approach estimates markups from output elasticities of flexible inputs and their cost shares in revenue. Recent studies document that markups recovered from different flexible inputs frequently disagree. We show that such conflicting markups arise because standard estimation procedures do not fully exploit the implications of their most prominent maintained assumption — cost minimization. We develop a novel econometric framework that embeds cost-minimization conditions directly into estimation, through cost shares of flexible inputs, while retaining the common Hicks-neutral productivity process. The resulting semi-nonparametric model provides the minimal structure to identify a flexible parameterization of the scale elasticity. Output elasticities can then be recovered from the common scale elasticity via cost minimization, and the resulting markups are invariant across flexible inputs by construction. We show that the key to obtaining invariance in markup estimates is an estimation procedure that enforces consistency of the production function parameters with the optimality conditions of the maintained cost minimization assumption---whether done directly, as in our framework, or indirectly via factor-augmenting productivity. These conclusions are illustrated empirically using manufacturing data from Colombia, Chile, and the United States.