Flexible Functional Forms and Curvature Conditions: Parametric Productivity Estimation in Canadian and U.S. Manufacturing Industries

Abstract

It is well-known that econometric productivity estimation using flexible functional forms often encounter violations of curvature conditions. However, the productivity literature does not provide any guidance on the selection of appropriate functional forms once they satisfy the theoretical regularity conditions. In this paper, we provide an empirical evidence that imposing local curvature conditions on the flexible functional forms affect total factor productivity (TFP) estimates in addition to the elasticity estimates. Moreover, we use this as a criterion for evaluating the performances of three widely used locally flexible cost functional forms - the translog (TL), the Generalized Leontief (GL), and the Normalized Quadratic (NQ) - in providing TFP estimates. Results suggest that the NQ model performs better than the other two functional forms in providing TFP estimates.