Measuring technological change using a latent variable approach

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Abstract
The state of technology is an unobservable variable in transformation functions. The study introduces a latent variable structural equation approach to modelling technological change in US agriculture. The proposed approach combines the parametric production (cost) function and the discrete total factor productivity index approaches together and minimises measurement errors. The technological change for the US agriculture is assumed to be caused by agricultural research, extension, and the farmers' educational backgrounds. The results are compared with the conventional total factor productivity measurement and show that the estimated technology index has a higher annual growth rate than the discrete total-factor-productivity index estimates