Output Decomposition in the Presence of Input Quality Effects: A Stochastic Frontier Approach

How do physical capital accumulation and Total Factor Productivity (TFP) individually add to economic growth? We approach this question from the perspective of the quality of both labor and physical capital, namely human capital and the age of physical capital. We build a unique dataset by explicitly calculating the age of physical capital for each country and each year of our time frame and estimate a stochastic frontier production function incorporating input quality in five groups of countries (Africa, East Asia, Latin America, South Asia, and West). Physical capital accumulation generally proves much more important than either the improved quality of factors or TFP growth in explaining output growth. The age of capital decreases growth in all groups except in Africa, while human capital increases growth in all groups except in East Asia.