Reliability of the Translog Cost Function : Some Theory & an Application to the Demand of Energy in French Manufacturing

We investigate the behavior of three versions of the translog cost function: the standard Log-quadratic version and two nonlinear versions with exponential and linear technical progress biases, respectively. Their performances are assessed according to three criteria: (i) on theoretical ground, (ii) on their ability to provide plausible estimates of economic and technological characteristics, and finally, (iii) on their reliability of fit for input shares, input-output ratios and unit cost. The most important result is that the standard form exhibits some weakness in fitting. We show via a series of experiments that those imprecisions are due to a lack of flexibility of the Log-quadratic form. Therefore, our results suggest that caveats should be attached to several previous studies, and care must be taken by future researchers who use such models