FLEISHER AND CHEN Our second reason is, in a sense, philosophical and rests on the belief that there is an inherent arbitrariness in distinguishing between the levels of technology and technical efficiency. One source of this arbitrariness is the need to specify the mathematical form of the time paths of technical progress and technical efficiency. The allocation of TFP change between technical progress and changes in technical efficiency depends on the time paths as- umed. Arbitrariness also arises in attempting to allocate the causes of failure to adopt""best'available technology, which may arise from: (i) failure to invest in physical capital in which the technology is embodied; (ii) lack of human capital, or knowledge of the best available technology; and (iii)adverse incentives due to market institutions. government controls. etc. Economic reforms since 1979 are designed to take care of item(iii) and are evidently reflected in the increased efficiency identified by Lau and Brada in the early years of the reform era. If TFP is below its maximum due to(i) or(ii),is this necessarily"inefficient?" The answer depends in part on one's view of capital markets, available resources, and capital constraints. This study fo- cuses on(i)and (ii)as possible explanations of provincial differences in TFP The second methodological issue is specification of the form of the produc tion function In our empirical work, we assume a Cobb-Douglas production function with Hicks-neutral technology. G. S. Maddala(1979) points out that within the class of functions... Cobb-Douglas, generalized Leontief, homogeneous translog, and homogeneous quadratic, differences in the func tional form produce negligible differences in measures of multi-factor produc- tivity. ' Imposing the Cobb-Douglas specification in the context of the Solow growth model is analogous to the standard growth-accounting technique of using hypothetical factor elasticities to compute TFP or TFP change as a esidual. We, however, estimate our(constant)factor elasticities simultane- ously with our estimates of TFP and TFP growth 2.2. An Empirical Model The Cobb-Douglas production function with Hicks-neutral technology is Y,,=A,KhLiI'e'u where i and t index the provinces and time, respectively. We specify Ais A, oe,+2. as the systematic component of TFP at time t, which includes all factors contributing to output other than labor L and physical capital K at Another potentially serious problem, however, is pointed out by Guang H. Wan(1995), who argues that alternative specifications, e.g, Hicks-neutral, Harrod-neutral, can influence estimates of the degree of technical change222 FLEISHER AND CHEN Our second reason is, in a sense, philosophical and rests on the belief that there is an inherent arbitrariness in distinguishing between the levels of technology and technical efficiency. One source of this arbitrariness is the need to specify the mathematical form of the time paths of technical progress and technical efficiency. The allocation of TFP change between technical progress and changes in technical efficiency depends on the time paths as￾sumed. Arbitrariness also arises in attempting to allocate the causes of failure to adopt ‘‘best’’ available technology, which may arise from: (i) failure to invest in physical capital in which the technology is embodied; (ii) lack of human capital, or knowledge of the best available technology; and (iii) adverse incentives due to market institutions, government controls, etc. Economic reforms since 1979 are designed to take care of item (iii) and are evidently reflected in the increased efficiency identified by Lau and Brada in the early years of the reform era. If TFP is below its maximum due to (i) or (ii), is this necessarily ‘‘inefficient?’’ The answer depends in part on one’s view of capital markets, available resources, and capital constraints. This study fo￾cuses on (i) and (ii) as possible explanations of provincial differences in TFP. The second methodological issue is specification of the form of the produc￾tion function. In our empirical work, we assume a Cobb–Douglas production function with Hicks-neutral technology. G. S. Maddala (1979) points out that ‘‘within the class of functions . . . Cobb–Douglas, generalized Leontief, homogeneous translog, and homogeneous quadratic, differences in the func￾tional form produce negligible differences in measures of multi-factor produc￾tivity.’’ Imposing the Cobb–Douglas specification in the context of the Solow growth model is analogous to the standard growth-accounting technique of using hypothetical factor elasticities to compute TFP or TFP change as a residual. We, however, estimate our (constant) factor elasticities simultane￾ously with our estimates of TFP and TFP growth.4 2.2. An Empirical Model The Cobb–Douglas production function with Hicks-neutral technology is given by Yi,t Å Ai,tKb i,tL10b i,t eei,t , (1) where i and t index the provinces and time, respectively. We specify Ai,t Å Ai,0eg1i t/g2i t 2 as the systematic component of TFP at time t, which includes all factors contributing to output other than labor L and physical capital K at 4 Another potentially serious problem, however, is pointed out by Guang H. Wan (1995), who argues that alternative specifications, e.g., Hicks-neutral, Harrod-neutral, can influence estimates of the degree of technical change. AID JCE 1462 / 6w10$$$122 09-30-97 14:16:24 cea