Consequences of mis-specifying the error term for the Cobb-Douglas production model

Ebitare Samson, Sagbama Humphr

Abstract

The Cobb-Douglas model is a common occurrence in econometrics and other areas of research. Earlier results show that the consequence is more serious when a multiplicative error plagued data set is fitted with an additive error based model than vice-versa. In this study, involving large samples, we investigate the impact of multicollinearity in nonlinear econometric models with mis-specified error terms. . As it was in small samples, we observe that in large samples the above result and trend also hold in the presence of multicollinearity. It is also observed that the effect of multicollinearity is not purged by large sample size.