Q2 Z2,(Q2) Z2(Q2) - Institute for Water Resources - U.S. Army

limited to the cost and production relations of the firm and the pro-
cess; more aggregative relationships (such as economy-wide or industry
analysis) are ignored. Moreover, the discussion is general in that
methods are considered, not specific applications of those methods.
Statistical Approach. 15 Estimation of cost and production func-
tions by statistical methods depends on data generated during the opera-
tions of the firm or process. It is unlikely that firms will be in
long-run equilibrium at the time they are observed. If they are not,
then it is not likely that a long-run cost or production function will
be estimated. :Therefore, statistically-estimated cost and production
functions are.merely a means of summarizing actual operating. conditions. ,
at particular times. These functions do not possess the characteristics
of production efficiency and cost minimization displayed by their theo-
retical counterparts.
Apart from this basic criticism of the statistical approach, there
are a host of other problems. In statistical estimation of cost and.
production functions, choice of an algebraic form of the function is
important. This may be based on some knowledge of the physical nature
of the productive process or merely on the basis of "goodness of fit"
criteria. In simultaneous equation models the problem of identifica-
tion remains after the form of the model has been chosen, and the prob-
lems of estimation vary considerably according to the specification of •
the model. Since the source of much cost information is accounting
data, deficiencies which characterize these data carry over to the es-
timated functions.
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