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Imposing regularity conditions on a system of cost and factor share equations

Imposing regularity conditions on a system of cost and factor share equations Systems of equations comprising cost functions and first‐order derivative equations are often used to estimate characteristics of production technologies. Unfortunately, many estimated systems violate the regularity conditions implied by economic theory. Sampling theory methods can be used to impose these conditions globally, but these methods destroy the flexibility properties of most functional forms. We demonstrate how Bayesian methods can be used to maintain flexibility by imposing regularity conditions locally. The Bayesian approach is used to estimate a system of cost and share equations for the merino wool‐growing sector. The effect of local imposition of monotonicity and concavity on the signs and magnitudes of elasticities is examined. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Australian Journal of Agricultural Resource Economics Wiley

Imposing regularity conditions on a system of cost and factor share equations

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References (31)

Publisher
Wiley
Copyright
Copyright © 2000 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1364-985X
eISSN
1467-8489
DOI
10.1111/1467-8489.00101
Publisher site
See Article on Publisher Site

Abstract

Systems of equations comprising cost functions and first‐order derivative equations are often used to estimate characteristics of production technologies. Unfortunately, many estimated systems violate the regularity conditions implied by economic theory. Sampling theory methods can be used to impose these conditions globally, but these methods destroy the flexibility properties of most functional forms. We demonstrate how Bayesian methods can be used to maintain flexibility by imposing regularity conditions locally. The Bayesian approach is used to estimate a system of cost and share equations for the merino wool‐growing sector. The effect of local imposition of monotonicity and concavity on the signs and magnitudes of elasticities is examined.

Journal

The Australian Journal of Agricultural Resource EconomicsWiley

Published: Mar 1, 2000

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