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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 19:32:25 -0000

We don't or need not disagree on the point you mention. Height of trees
and capital stock need not be equally easy to measure, and I was not
trying to imply otherwise, although anyone who thinks a redwood tree is
trivial to measure should go and try it. My point was different and
elementary: the same equations may apply in different situations.

You started this thread implying that you need a program other than
-levpet-. From what you say I don't think you do but I'll leave it to
economists now to comment further if they wish. 


Prabal De

  Thanks a lot for your engaged response, I really appreciate. I did
not elaborate because I thought there are some obvious references that
I am missing. It turns out that it is unlikely to be true.

I agree with most of the concerns (definition of capital, TFP increase
vs. mark up increase, finished goods as intermediates). I don't think
the extant literature deal very precisely with these, mostly due to
data limitations, at least in developing countries. Now I also agree
with Nick that some if not all are relevant for mfg firms. Questions
are 1)how do parameters differ if we use the same functions and same
definitions of variables for mfg and service firms and 2) how do
parameters differ if we have different definitions of variables and 3)
should we use different definitions of variables?

I disagree with one aspect of Nick's example. While certain natural
phenomena like growth of trees can be exactly measurable, things like
capital stock are more elusive.

My data comes from balance sheets of firms. Hence it has sales,
assets, wage bill, capital stock, investments, fuel, material and a
bunch of other cost items. No plant level information.

Thanks again for taking your time to engage in this.

On 10/27/09, Nick Cox <> wrote:
> Thanks for this. Perhaps my question was too cryptic, but I don't see
> 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
> Nick:
> 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
> Let
>> me guess: "Total Factor Productivity"?
>> As far as I can tell, not even the -rather comprehensive- article
>> introducing -levpet-
>> mentions
> this
>> term....
> Nick Cox
>> Just curious, as I only understand some of this and it's not my
>> 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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