On Restricted Least Squares: the Cobb-Douglas Production Function for the Nigerian Economy

Abstract

The Cobb-Douglas production function (Y = AL^?K^?) is still today the most ubiquitous form in theoretical and empirical analyses of growth and productivity (Felipe and Adams, 2005). This paper examines the Nigerian economy from 1990 to 2009 and uses the “F-test” approach of Restricted Least Square (RLS) to find out if the linear restriction of Cobb-Douglas production function’s parameters (? + ?) = 1 is significant to Nigeria economy. Using data on Nigeria’s Gross Domestic Product (GDP), Capital and total labour force, it was found that the Nigerian economy is probably characterized by constant returns to scale over the sample period and therefore, using the restricted regression as stipulated by Cobb-Douglas function may not be misleading. Hence, if Capital/Labour ratio increased by 1 percent, on average, labour productivity went up by about 1 percent.

Keywords: Regression, Restricted Least Square, Cobb-Douglas, Returns to Scale