A Cross Section Estimate of Translog Production Function: Jordanian Manufacturing Industry

The objective of this paper is to estimate the Transcendental Logarithmic Production Function of manufacturing industry in Jordanian economy. Manufacturing industry can be considered as the fourth large one in Jordanian economy. In last decade, the growth rate in this sector is the second one after transport and communications. The gross fixed capital formation in manufacturing is the third one. In this paper we need a cross sectional data for cost shares, factor inputs, factor prices, and output. Main source of data for manufacturing industry in Jordan is the Industry Survey Department Statistics the Hashemite Kingdom of Jordan. The data for factor inputs and output were transferred to logarithm. A point around which production function should be estimated was chosen. Cost shares of inputs have been calculated by dividing compensations to employees, operating surplus, and value of materials by value manufacturing output. The theoretical framework in this research is the flexible production function. S0, the thee-input transcendental logarithmic (Translog) production function could be used. This function is approximated by second order Taylor series. The log of likelihood ratio test has been used to choose among different hypotheses. The symmetric translog hypothesis has been found as an appropriate one among other hypotheses. It is well behaved, where positivity and concavity of production function have been satisfied. After testing for nested hypotheses, the symmetry restrictions were be imposed. So, restricted and unrestricted functional forms are estimated. However, Iterative Zellner-Efficient Estimate has been used to get estimates equivalent to the maximum likelihood estimates. Allen partial elasticities of substitution, AES, and own and cross price elasticities for factor inputs have been calculated. AES measure the substitutability or complement among factors of production. On the other hand, AES can measure the curvature of isoquant. AES shows that capital-labor, capital–materials, and labor-materials are all substitutive. But, AES for labor-materials is more than a half of that for capital-labor. AES for capital-labor is one and three fourth of that for labor-materials. The Price elasticities of factor inputs show that capital and labor demand are more elastic than demand for materials. JEL Classification Codes: D2