| This study assesses the empirical and policy implications of using the differential approach in opposition to dual specifications for the decisions of the multiproduct firm. In applied production analysis, the dual specifications of the firm's technology usually fail to satisfy the theoretical properties of the cost or profit function. If the validity of those properties is not examined, then empirical results should be interpreted with caution. On the other hand, the differential production model of the multiproduct firm has rarely been tested empirically, since it was first developed by Laitinen and Theil in 1978.; The novelty of this study is that it generalizes the differential production model for the multiproduct firm to account for quasi-fixed inputs in production; and to account for production technologies that are not output homogeneous, as assumed in the original model. Another objective of this study was to provide alternative parameterizations of the differential model, to account for variable coefficients over time. For this reason a supermodel was developed that contains different specifications that can be tested by simple parameter restrictions. Further, maximum likelihood estimators were provided for the case of panel data in the differential model. The contribution of these estimators to the econometrics' literature was the consideration of nonlinear symmetry constraints for the differential model under balanced and unbalanced panel data designs.; The extended differential production model was applied to the U.S. banking industry for the period 1990--2000. To assess the empirical results of the differential model (and to provide a direct comparison with a dual specification), a translog cost function was applied to the same dataset. Results indicated that the differential model is consistent with economic theory, while the translog specification failed to satisfy the concavity property of the cost function for each year in the sample. Concerning the Allen elasticity of substitution both models found similar results. One disadvantage of the differential model was the assumption of perfect competition, which resulted in total revenue over total cost being the measure of scale economies. |
