Aggregation Over Firms and Flexible Functional Forms
journal contributionposted on 05.06.2017 by Kim, H. Youn
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This paper presents a generalized class of cost functions suitable for aggregation of firms and considers various flexible functional forms to assess whether they possess desirable aggregation properties. This set of cost functions includes two output functions and subsumes linear and nonlinear cost functions employed in existing analyses. While the quadratic and the generalized Leontief and McFadden cost functions satisfy the generalized aggregation condition, the translog cost function and its variants are less capable of possessing desirable aggregation properties. A modified quasi-homothetic translog form is presented that is useful for aggregate analysis. Possible extensions of the generalized aggregation rule are discussed.