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RE: st: AW: RE: levpet for service sector firms

From   "Nick Cox" <>
To   <>
Subject   RE: st: AW: RE: levpet for service sector firms
Date   Tue, 27 Oct 2009 18:17:15 -0000

Thanks for this. Perhaps my question was too cryptic, but I don't see an
answer here, or elsewhere in this thread. I can fit power functions to
raspberry bushes and redwood trees and I am not surprised that the
variables' values differ and possibly the parameter values too. But I
don't need different software in the two cases. The equations are the
same. What differs in your case? 


Prabal De

My Bad. It does stand for Total Factor Productivity which is
contribution of the 'residual term' A after factoring out
contributions of labor and capital in a production function. For a log
Cobb-Douglas production function

logY = logA + (alpha)logL + (1-alpha)logK

Since this is essentially an "accounting" procedure, TFP will be
mechanically high if you have low labor and capital. And
Levinsohn-Petrin procedure controls for endogeneity in capital stock
by instrumenting with intermediate inputs like fuel.
Now intuitively, for service sector firms both physical capital and
fuel are much less important. Then one argument is that they DO have
very high TFP. I haven't found a logic contrary to this myself except
toying with other intermediate inputs like communication expenses(nor
any reference), but then there are smarter economists around and in
Statalist. I still hope someone can shed more light on this issue.

On 10/27/09, Martin Weiss <> wrote:
> Prabal may also want to let statalisters know what "TFP" stands for...
> me guess: "Total Factor Productivity"?
> As far as I can tell, not even the -rather comprehensive- article
> introducing -levpet-
> mentions
> term....

Nick Cox

> Just curious, as I only understand some of this and it's not my field:
> why do different numbers require a different logic?

Prabal De

>   I am trying to estimate a production function for service sector
> firms using <levpet>. However, the usual method for manufacturing
> sector is giving very high TFPs as naturally the service sector firms
> use less physical capital. Is there is variation of the levpet
> procedure for service sector firms?

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