Two Step Estimation Method for Translog Cost Function : An Application to Spanish Airport Network

Abstract

This article reports on the use of a two-step estimation method to analyze the productive structure of the airport industry in Spain. The author used the dual cost function and translog joint cost function to complete the estimation method. The author derives some parameters from the translog function such as economies of scale and price elasticities. The author concludes that, particularly when the data is scarce, the two-step estimation method for translog cost function is a useful technique. Comparing the results obtained with the empirical evidence for the airport industry, the aggregate output variable can induce to substantial errors in the estimation of technological parameters. In a practical example, the author notes that the separation of passenger and freight data into separate categories to measure airport output allows one to support the hypothesis that the economies of scale verified in the airport industry are associated with load and unload operations rather than with handling passengers through the terminal building.