Shape constrained kernel-weighted least squares: Application to production function estimation for Chilean manufacturing industries

Abstract: In this paper we examine a novel way of imposing shape constraints on a local polynomial kernel estimator. The proposed approach is referred to as Shape Constrained Kernel-weighted Least Squares (SCKLS). We prove uniform consistency of the SCKLS estimator with monotonicity and convexity/concavity constraints and establish its convergence rate. The competitiveness of SCKLS is shown in a comprehensive simulation study. Finally, we analyze Chilean manufacturing data using the SCKLS estimator and quantify production in the plastics and wood industries. The results show that exporting firms have significantly higher productivity.