Handling the measurement error problem by means of panel data: Moment methods applied on firm data

provided by Research Papers in Economics

HANDLING THE MEASUREMENT ERROR PROBLEM
BY MEANS OF PANEL DATA:

MOMENT METHODS APPLIED ON FIRM DATA *)

by

Erik Bi0rn

University of Oslo, Department of Economics,
P.O. Box 1095 Blindern, 0317 Oslo, Norway.
e-mail: [email protected]
phone: +47 22 85 51 20

February 27, 2002

Abstract

The estimation of a linear equation from panel data with measurement errors is consid-
ered. The equation is estimated (I) by methods operating on the equation in differenced
period means, and (II) by Generalized Method of Moments (GMM) procedures using
(a) the equation in differences with instruments in levels and (b) the equation in levels
with instruments in differences. Both difference transformations eliminate unobserved
individual heterogeneity. Examples illustrating the input response to output changes for
materials and capital inputs from an eight year panel of Norwegian manufacturing firms,
are given.

Keywords: Panel Data. Errors-in-Variables. GMM Estimation.

Factor Demand. Returns to scale

JEL classification: C13, C23, D24, L60.

*) Paper to appear in: B.P. Stigum (ed.): Econometrics and the Philosophy of
Economics. Princeton: Princeton University Press.

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