Total factor productivity (TFP) computed as Solow-residuals could be subject to input-substitution bias for two reasons. First, the Cobb-Douglas (CD) production function restricts all input substitutions to one. Second, observed inputs generally differ from optimal inputs, so that inputs...

This paper develops and illustrates the multi-step generalization of the standard single-step perturbation (SSP) method or MSP. In SSP, we can think of evaluating at x the computed approximate solution based on x0, as moving from x0 to x in "one big step" along the straight-line vector x-x0. By...