Choice of the empirical definition of zero in the translog multiproduct cost functional form

ABSTRACT

The translog cost function is valuable to researchers for empirical analysis in themodelling of indirect cost and profit functions. A flaw of the functional form is in themodelling of zero output values. This study examined the impacts of empirical definition of zero output values on price elasticities, economies of scope and scale, using the translog cost function. Estimation of a system of cost and factor share equations with regularity condition imposed was conducted. Results show that the choice of default values affects policy recommendations.

KEYWORDS:

• Economies of scope
• scale economies
• translog function
• curvature

JEL CLASSIFICATION:

• C52
• C13
• D24

Acknowledgement

The authors would like to acknowledge the valuable comments of an anonymous reviewer on an earlier version of this article. All remaining errors are the authors’ responsibility.

Disclosure statement

No potential conflict of interest was reported by the authors.