The estimation of transport cost functions: a methodological review

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Abstract
This paper offers a review of the methodological aspects involved in the estimation of cost functions for the transportation industries. Major advances are detected in the econometrics involved in that estimation, particularly in terms of the usage of flexible forms in the functional specification. It is argued that, although theoretical properties of the cost function have been gradually incorporated in the applied work, the characterization and treatment of transportation output has received comparatively less attention. Virtually all studies up to date have used ton‐miles, or similar measures, as the basis for output description. Available studies present inconsistencies with observed industry behaviour, which makes policy conclusions potentially unreliable. Output exogeneity, which lies in the centre of the cost minimizing behaviour, has been offered weak justification. Better treatment of output measures and careful analysis of the behaviour of firms should be added to the econometric improvements already made, to allow for the analysis of production complementarity and to obtain more reliable conclusions.

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