Sun, Sizhong, and Anwar, Sajid (2024) Can We Reliably Identify the CES Preference Parameter from Firm Revenue and Cost Data? Evidence from Monte Carlo Experiments. Journal of Quantitative Economics, 22. pp. 791-805.

Preview

PDF (Published Version) - Published Version Available under License Creative Commons Attribution. Download (1MB) | Preview

Abstract

In empirical studies involving the estimation of structural parameters, a commonly used strategy to identify the CES preference parameter is to assume that firms have a constant marginal cost (MC). This assumption allows one to utilize the link between the total variable cost and total revenue implied by profit maximization to recover the CES preference parameter. This paper explores the robustness of the constant MC assumption in Monte Carlo experiments, where the control group consists of simulated constant MC firms and the treatment group involves different degrees of violation of the assumption. The results of our experiments show that the constant MC assumption indeed has a high identification power. Nevertheless, researchers need to ensure that their samples contain a sufficient proportion of constant MC firms, which, in our experiments, must be around 20 percent. We also find that, irrespective of the actual proportion of constant MC firms in the sample, the constant MC assumption correctly identifies the CES preference parameter if the elasticity of substitution within the industry is 2.5 or lower.

Item ID:	85721
Item Type:	Article (Research - C1)
ISSN:	2364-1045
Copyright Information:	This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/ licenses/by/4.0/.
Date Deposited:	03 Jun 2025 23:58
FoR Codes:	38 ECONOMICS > 3803 Economic theory > 380399 Economic theory not elsewhere classified @ 100%
SEO Codes:	15 ECONOMIC FRAMEWORK > 1599 Other economic framework > 159999 Other economic framework not elsewhere classified @ 100%
	More Statistics