An axiomatic nonparametric production function estimator: Modeling production in Japan's cardboard industry

Abstract: We develop a new approach to estimate a production function based on the economic axioms of the Regular Ultra Passum law and convex non-homothetic input isoquants. Central to the development of our estimator is stating the axioms as shape constraints and using shape constrained nonparametric regression methods. We implement this approach using data from the Japanese corrugated cardboard industry from 1997-2007. Using this new approach, we find most productive scale size is a function of the capital-to-labor ratio and the largest firms operate close to the largest most productive scale size associated with a high capital-to-labor ratio. We measure the productivity growth across the panel periods based on the residuals from our axiomatic model. We also decompose productivity into scale, input mix, and unexplained effects to clarify the sources the productivity differences and provide managers guidance to make firms more productive.