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

From   Prabal De <>
Subject   Re: st: AW: RE: levpet for service sector firms
Date   Tue, 27 Oct 2009 15:49:13 -0400

Thanks. To be precise, I wanted to know if researchers have used
intermediate inputs other than customary ones such as fuel and
material in estimating mfg sector input.

1. Data is from Indian firms from a database called PROWESS.
Unfortunately, to my knowledge, this is available mostly in India.
2. Yes, I am taking the value-added route to the levpet procedure (too
many investment data is missing to implement Olley-Pakes)
3. Capital is owned by firm as reported by the firm in their balance
sheet. There is no financial firms.
4. I am thinking about how to include the leased capital for the
service sector. I have to dig up the documentation. Thanks very much
for this suggestion.

Am I right in being convinced that not much TFP estimation has been
done for the service sector?


On 10/27/09, Austin Nichols <> wrote:
> Prabal De <> :
> Still no mention of how capital is measured, nor how output is
> measured--are you using the "value-added" outcome mentioned in
> by any
> chance, subtracting off "a bunch of other cost items" representing
> intermediate goods?  Are you using book value of capital?  Owned by
> the firm?  No mention of depreciation, but it's probably on the data.
> Perhaps property/plant/equipment (PPE) is more often owned in
> manufacturing but leased in service sectors, and you are disregarding
> leased capital; what country's data are you using?  These details are
> especially important in what is `essentially an "accounting"
> procedure.' You will often be better off with OLS than with a weak IV
> strategy...
> On Tue, Oct 27, 2009 at 3:14 PM, Prabal De <> wrote:
>> Dear All,
>>  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.
>>          Best,
>>  Prabal
>> On 10/27/09, Nick Cox <> wrote:
>>> 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?
>>> Nick
>>> 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 for...
>>> 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 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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