The Impact of Trade Liberalization on Iran’s Manufacturing TFP: An Application of Olley -Peaks Approach

Productivity is often computed by approximating the weighted sum of the inputs from the estimation of the Cobb-Douglas production function. Such estimates, however, may suffer from simultaneity and selection biases. Olley and Pakes (1996) introduced a semi-parametric method which allows us to estimate the production function parameters consistently and thus obtain reliable productivity measures by controlling for such biases. This study first reviews this method and then introduces a Stata(10) command to implement it for manufacturing industry in Iran. The results show that material, skill labor and capital play important role in production function and this is increasing return to scale (IRS) by estimation of Olley and Pakes approach versus decreasing return to scale (DRS) by fixed effect. After estimation of production and calculated total factor productivity (TFP), we concluded that the effect of export and exit rate on TFP at manufacturing industry (ISIC 4digits) in Iran is not very considerable to compare to import penetration coefficient and year effect.