QUADRATIC SPLINE MODELS FOR PRODUCERS SUPPLY-AND-DEMAND FUNCTIONS

In this paper we propose and estimate a system of producer output supply and input demand functions that generalizes the standard normalized quadratic form. The generalization adds either linear or quadratic splines in a time (or technical change) variable, yet retains the main attractive property of the normalized quadratic, which is that it can provide a local second order approximation while maintaining the correct curvature globally. However, the generalization has additional desirable approximation properties with respect to the splined variable, and thus permits a more flexible treatment of technical change than is provided by standard flexible functional forms.