1983/10/01 by David K. Guilkey, C. A. Knox Lovell, Robin C. Sickles · 4 citations
Economics, Econometrics and Finance · #Economics of Agriculture and Food Markets #Monetary Policy and Economic Impact #Global trade and economics
paper · doi:10.2307/2648788
When selecting a functional form for use in empirical work, one is confronted by a choice between forms that exhibit good behavior globally and those that possess flexibility. Relatively simple forms, such as Cobb-Douglas and CES, satisfy certain regularity conditions globally, but the very simplicity that guarantees global good behavior also prevents such forms from modelling very sophisticated technologies. On the other hand, relatively complex forms having the flexibility to model fairly sophisticated technologies have been developed, but their very flexibility prevents them from being well-behaved globally. The current trend is clearly toward the development and use of flexible forms which, although not globally well-behaved, may nonetheless satisfy the desired regularity conditions over a range of observations that contain or intersect the set of sample observations. In light of their inability to satisfy regularity conditions globally, and in light of the substantial econometric sophistication required in their estimation, it is worthwhile investigating just how well various flexible forms do model technology. This can be accomplished in a number of ways. Berndt, Darrough and Diewert [1977] simply fitted three flexible forms translog, generalized Leontief and generalized Cobb-Douglas to postwar Canadian expenditure data, and found the translog model to be preferred on Bayesian grounds a posteriori. Applebaum [1979] and Berndt and Khaled [1979] developed generalized Box-Cox forms that contain the translog, generalized Leontief, and generalized square root quadratic forms as special or limiting cases. Using 1929-1971 U. S. manufacturing data, Applebaum found that the generalized Leontief and generalized square root quadratic forms the best representations for the primal and dual specifications of technology. Using 1947-1971 U. S. manufacturing data, Berndt and Khaled were able to reject the generalized square root quadratic restriction, but unable to reject the generalized Leontief restriction; tests concerning the translog restriction were inconclusive. A difficulty with this empirical approach is that the true technology is unknown. Evaluating the performance of flexible forms on the basis of how well they fit observed data is useful if interest centers on the data, but may be misleading if