Economic Theory as a Guide for the Specification and Interpretation of Empirical Household Production Functions

Type Working Paper
Title Economic Theory as a Guide for the Specification and Interpretation of Empirical Household Production Functions
Author(s)
Publication (Day/Month/Year) 2014
URL https://pdfs.semanticscholar.org/a250/a48b78078e9a77663505417077ea5c40cc7f.pdf
Abstract
We employ a model of utility maximization with household production to derive empirical hybrid production functions and interpretations of the e↵ects of observable inputs on household products when unobserved inputs are optimally chosen by households. Instrumental variable approaches cannot yield consistent estimates of marginal e↵ects of observed inputs due to unobserved inputs being consumer choice variables. A correctly specified hybrid model can sometimes provide bounds for true marginal products. We further derive how conditioning on information about household consumptions of non-production goods can increase the accuracy of the bounds. Most studies in the existing household production literature ignore these issues.

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