Incorporating monotonicity and concavity conditions in flexible functional forms

Abstract

Empirical economists using flexible functional forms often face the disturbing choice of drawing inferences from an approximation violating properties dictated by theory or imposing global restrictions that greatly restrict the flexibility of the functional form. Focusing on the cost function, this paper presents an alternative approach which imposes monotonicity and concavity properties only over the set of prices where inferences will be drawn. An application investigating elasticities for Berndt-Wood data set using the translog, generalized Leontief, and symmetric generalized McFadden flexible functional forms illustrates the technique. © 1996 John Wiley & Sons, Ltd.

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