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On the Benefits of Normalization in Production Functions

Research output: Working paper

Published
Publication date01/2019
Place of PublicationLancaster
PublisherLancaster University, Department of Economics
Original languageEnglish

Publication series

NameEconomics Working Papers Series

Abstract

A growing literature demonstrates that production function normalization yields
important benefits in both empirical and theoretical macroeconomics. Yet normalization has remained notably absent from the microeconomic literature. This paper introduces the concept of normalization within the microeconomic context, and establishes that it could provide substantial improvements in the interpretability, the tractability, and the applicability of a broad class of economic production functions. Since any production function is merely a specialized interpretation of some decision-maker's utility function, our analyses also generalize to the wider context of utility functions. We therefore conclude that the benefits of normalization may be pervasive.