Estimating a non-neutral production function: a heterogeneous treatment effect approach

This paper addresses the issue of estimating a production function that allows us to depart from the standard hypothesis of Hicks neutrality while also coping with the endogeneity of a dummy innovation variable. We consider specifications that relax Hicks neutrality, and we derive the testable conditions for common parametric approximations under which Hicks neutrality holds. The model is estimated through instrumental variables methods, allowing for a heterogeneous effect of innovation on the production process. The econometric analysis rejects Hicks neutrality and highlights three main features: i) a capital-saving technology of innovative with respect to non-innovative firms, ii) a locally progressive technical change and iii) fully heterogeneous technologies when comparing innovative to non-innovative firms.