#Cobb douglas production function how to

This paper-a product of Trade, Development Research Group-is part of a larger effort in the group to explore conceptual and practical issues relative to the effects of international trade policy on individual producers. They also indicate the size of the error introduced by the common “trick” of adding a “small” value to zero input values. It is named after its pioneer Douglas who fitted a function suggested by Cobb on the basis of the statistical data pertaining to the entire business of. The estimations provide a clear measurement of the degree of essentiality of potentially non-essential inputs. Many households did not use family or hired labor in farm production, or had different capital composition (that is, zero value for non-land farm assets). To highlight the empirical importance of the approach, he applies it to Mexican farm-level production data that he gathered. By using the properties of translatable homothetic functions, he estimates by how much the origin of the input set should be translated to allow the Cobb-Douglas functional form to capture the fact that the data have a positive output even when some of the inputs are not used. Soloaga presents an alternative method that allows one to estimate the degree of essentiality of the production inputs while retaining the Cobb-Douglas specification.

In general, the estimates obtained are extremely sensitive to the transformation chosen, generating doubts about the use of a specification that assumes that all inputs are essential (as the Cobb-Douglas does) when that is not the case. The standard approach for fitting a Cobb-Douglas production function to micro data with zero values is to replace those values with “sufficiently small” numbers to facilitate the logarithmic transformation. But can we do better than that? An alternative approach is presented and applied to Mexican farm-level data.

As the log of zero is not defined, one standard procedure is to arbitrarily replace those zero values with “sufficiently small” numbers.

#Cobb douglas production function how to

December 2000 One problem when estimating a Cobb-Douglas production function with micro data is how to deal with the observations that show positive output but do not use some of the inputs.