Productivity and Performance: A GMM approach

In this paper we propose a single-step generalized method of moments (GMM) approach to estimate a production function with multiple quasi-fixed and variable inputs as well as productivity and inefficiency. Our approach relies on the system consisting of the production function, the first-order conditions of expected profit maximization with respect to the variable inputs, as well as general formulations for dynamic productivity and inefficiency. The estimation procedure takes care of correlations of both productivity and inefficiency with the variable inputs without using any distributional assumptions on the error terms (including inefficiency) in the system. We use Indonesian manufacturing census data to illustrate workings of our procedure.