Testing the Validity of Aggregates

Abstract

This article develops a new approach for testing aggregation restrictions in estimated production-function and cost-function models. Rather than using the well-known separability conditions for the existence of an aggregate, this approach focuses on testing whether a particular aggregate is valid and develops empirically testable necessary and sufficient conditions for the validity of some known aggregation scheme. An empirical section examines the power of this test in the context of a simple production-function model.

KEY WORDS:

• Aggregation
• Monte Carlo
• Separability