FLEISHER AND CHEN YN◆HEc)◆Js[C) -P 1978 Yuan FIG. 1. Provincial TFP and TFP growth, 1988 of TFP and TFP growth for the year 1988 are depicted in Fig. l, with coastal provinces indicated by the( C)notation. Our estimates of the determinants of TFP and TFP growth are containe in Table 2. As can be seen by comparing the second and fourth columns with the first and third columns, respectively, the variables other than trend and the coast-noncoast dummy can account for virtually all of the coast-noncoast productivity gap. The coefficient of capital vintage, while of the hypothesized The empirical formulation of Eq. (3)uses the arithmetic form, rather than the log form, of the employment-change variable, n, because annual employment growth in some provinces is occasionally negative. This specification is approximately equivalent to using the log of n+ I Thus, it is impossible to impose the constraint on the estimated factor elasticities implied by the constant-returns-to-scale assumption implicit in Eqs. (1)-(3). It is apparent I that the three city provinces, Beijing, Tianjin, and Shanghai, appear as"in the sense that they exhibit much higher than average TFP, One of our referees suggested that inclusion of these urban outliers" may have had a substantial effect on our econometric results. However, when Eqs. 3)and (4)are estimated without Beijing, Tianjin, and Shanghai, the estimated coefficients and their significance are changed very little I4 Based on the estimated coefficient of In(/n), the elasticity of capital is approximately 0. 2, implying a labor elasticity of approximately 0.8. This is at the low end of estimates of the Chen and Fleisher(1996), Chow (1994), and Chen et al. (1988). We suspect that one reason for this relatively low estimate is omission of a human-capital variable from Eq ( 3)226 FLEISHER AND CHEN FIG. 1. Provincial TFP and TFP growth, 1988. of TFP and TFP growth for the year 1988 are depicted in Fig. 1, with coastal provinces indicated by the (C) notation.13,14 Our estimates of the determinants of TFP and TFP growth are contained in Table 2. As can be seen by comparing the second and fourth columns with the first and third columns, respectively, the variables other than trend and the coast–noncoast dummy can account for virtually all of the coast–noncoast productivity gap. The coefficient of capital vintage, while of the hypothesized 13 The empirical formulation of Eq. (3) uses the arithmetic form, rather than the log form, of the employment-change variable, n, because annual employment growth in some provinces is occasionally negative. This specification is approximately equivalent to using the log of n / 1. Thus, it is impossible to impose the constraint on the estimated factor elasticities implied by the constant-returns-to-scale assumption implicit in Eqs. (1)–(3). It is apparent in Fig. 1 that the three city provinces, Beijing, Tianjin, and Shanghai, appear as ‘‘outliers’’ in the sense that they exhibit much higher than average TFP. One of our referees suggested that inclusion of these ‘‘urban outliers’’ may have had a substantial effect on our econometric results. However, when Eqs. (3) and (4) are estimated without Beijing, Tianjin, and Shanghai, the estimated coefficients and their significance are changed very little. 14 Based on the estimated coefficient of ln(I/Y), the elasticity of capital is approximately 0.2, implying a labor elasticity of approximately 0.8. This is at the low end of estimates of the elasticity of production with respect to physical capital reported in the literature. See, for example, Chen and Fleisher (1996), Chow (1994), and Chen et al. (1988). We suspect that one reason for this relatively low estimate is omission of a human-capital variable from Eq. (3). AID JCE 1462 / 6w10$$$123 09-30-97 14:16:24 cea