The non-parametric approach assumes firms to operate in distortion-free perfectly
competitive markets. It should be noted that the perfect competition hypothesis implies that
firms are profit maximisers and factors are paid to their marginal product. In this manner,
output elasticities of factors equal to their respective shares of payment in national income.
However, in transitional and centrally planned markets, like the Chinese one, assuming
perfect competition and profit maximisation could not correspond to the reality. In China,
particularly, during the pre-reform period, prices were highly controlled by political
authorities. In the case of distorted prices, the use of factor shares as output elasticities may be
inappropriate and could result in some biased parameter estimates.