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Production Function Estimation with Unobserved Input Price Dispersion

Grieco, P.; Li, S.; Zhang, H.

Production Function Estimation with Unobserved Input Price Dispersion Thumbnail


P. Grieco

S. Li

H. Zhang


We propose a method to consistently estimate production functions in the presence of input price dispersion when intermediate input quantities are not observed. We find that the traditional approach to dealing with unobserved input quantities—using deflated expenditure as a proxy—substantially biases the production estimates. In contrast, our method controls for heterogeneous input prices by exploiting the first-order conditions of the firm's profit maximization problem and consistently recovers the production function parameters. Using our preferred method, we provide empirical evidence of significant input price dispersion and even wider productivity dispersion than is estimated using proxy methods.


Grieco, P., Li, S., & Zhang, H. (2016). Production Function Estimation with Unobserved Input Price Dispersion. International Economic Review, 57(2), 665-690.

Journal Article Type Article
Acceptance Date Jan 9, 2015
Online Publication Date Apr 28, 2016
Publication Date May 1, 2016
Deposit Date Aug 27, 2014
Publicly Available Date Apr 28, 2018
Journal International Economic Review
Print ISSN 0020-6598
Electronic ISSN 1468-2354
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 57
Issue 2
Pages 665-690
Public URL


Accepted Journal Article (Supplementary material) (515 Kb)

Copyright Statement
Supplementary material This is the accepted version of the following article: Grieco, P. L. E., Li, S. and Zhang, H. (2016), Production function estimation with unobserved input price dispersion. International Economic Review, 57: 665–690, which has been published in final form at This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.

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