Using price and demand information to identify production functions

This paper explores the use of information on the firm-level prices of the produced output and employed inputs, as well as on the firm-level demand relationship, to identify the parameters of the production function. By considering the system of equations which includes the demands for variable inputs, the demand for the product of the firm and the pricing rule, both the production function and the cost equation can be rewritten in terms of fixed inputs and exogenous determinants (semi-reduced forms). Consistent estimation of this two equation system is possible under no especial distri-bution assumptions on unobserved e fficiency and, in addition, an estimate of the price elasticity of demand is recovered.