Product Differentiation and Quality in Production Function Estimation

Production functions provide a mapping from the firms’ input quantity and productivity to output quantity. This mapping only generates unbiased estimates if input and output quality variation within and between observation units is accounted for. I review and classify state-of-the-art methods to address quality and price variation in production function estimation. Even if inputs and outputs are observed in quantities, unobserved quality variation might bias production function estimates for industries with differentiated products. To account for quality variation, I introduce product characteristics to the estimation procedure and provide an application to the European car industry.

Hahn, Nadine (2024), Product Differentiation and Quality in Production Function Estimation, ZEW Discussion Paper No. 24-049, Mannheim.