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Nonparametric tests of regularity conditions for production and consumption theory Parkan, Celik

Abstract

The theories of production and consumption have proven to be valuable tools in predicting variations in demand for factors of production (producer's demand) and for produced goods (consumer's demand) to changes in policy instruments. An important direction of inquiry, in the theory of production, has been on determining the functional form of production; another one, in the theory of consumption, has been on the observed behaviour of the consumer and the computation of index numbers. Econometricians, in estimating a production function, have been using parametric estimation techniques which always require the choice of a functional form for the underlying production operation. Also the classical assumption about the consumer has been that any purchase is such as to give a maximum of utility for the money spent. It is well known that economic agents' (producers' and consumers') optimizing behaviour implies certain restrictions on derived supply and demand patterns; e.g., see P.A. Samuelson or J.R. Hicks. Typical functional forms, for production, often used in empirical applications are either unsuitable for modelling the demand for factors of production or they do not always satisfy the regularity conditions that cost minimizing or profit maximizing behaviour imposes. Neither have econometricians always checked whether these restrictions are consistent with the functional forms for demand and supply equations which they use in their applied econometric work. This dissertation studies the nonparametric methods for testing the consistency of observations on quantities, prices, profits, costs and appropriate combinations of these with such regularity conditions as monotonicity, quasi-concavity, concavity, homotheticity, and separability. The approach has been that of unifying the existing body of knowledge in using linear programming as the test instrument and making extensions especially to cover multiple production, separability properties and nonparametric index numbers. The theoretical work has been substantiated by empirical tests on actual data and the computer codes are presented to facilitate further research in related areas.

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