A Primal Divisia Technical Change Index Based on the Output Distance Function

Abstract

We derive a primal Divisia technical change index based on the output distance function and further show the validity of this index from both economic and axiomatic points of view. In particular, we derive the primal Divisia technical change index by total differentiation of the output distance function with respect to a time trend. We then show that this index is dual to the Jorgenson and Griliches (1967) dual Divisia total factor productivity growth (TFPG) index when both the output and input markets are competitive; dual to the Diewert and Fox (2008) markup-adjusted revenue-share based dual Divisia technical change index when market power is limited to output markets; dual to the Denny et al. (1981) and Fuss (1994) cost-elasticity-share based dual Divisia TFPG index when market power is limited to output markets and constant returns to scale is present; and also dual to a markup-and-markdown adjusted Divisia technical change index when market power is present in both output and input markets. Finally, we show that the primal Divisia technical change index satisfies the properties of identity, commensurability, monotonicity, and time reversal. It also satisfies the property of proportionality in the presence of path independence, which in turn requires separability between inputs and outputs and homogeneity of subaggregator functions.Output distance function; Divisia technical change index; Imperfect competition; Axiomatic properties; Path independence.