The production and cost structure of Israeli industry Evidence from individual firm data

The main purpose of this paper is to present estimates of production and cost functions obtained from using a time-series, cross-section data set pertaining to Israeli industry. Our primary data set is an expanded version of the data used in Bregman, Fuss and Regev (1991), expanded to include 849 firms over the period 1979 to 1983 (4,245 observations). We include a detailed list of heterogeneity controls in the specifications which substantially enhances the explanatory power of the models and contributes to our understanding of the nature of Israeli industry. Econometric problems which arise in attempting to estimate production and cost functions from panel data, such as sample selectivity, serial correlation due to unobserved firm effects, and endogeneity are addressed.