Production technology estimates and balanced growth

Article English OPEN
Leon-Ledesma, Miguel A. ; McAdam, Peter ; Willman, Alpo (2015)

Capital-labor substitution and TFP estimates are essential features of many economic models. Such models typically embody a balanced growth path. This often leads researchers to estimate models imposing stringent prior choices on technical change. We demonstrate that estimation of the substitution elasticity and TFP growth can be substantially biased if technical progress is thereby mis-specified. We obtain analytical and simulation results in the context of a model consistent with balanced and near-balanced growth (i.e., departures from balanced growth but broadly stable factor\ud shares). Given this evidence, a Constant Elasticity of Substitution production function system is then estimated for the US economy. Results show that the estimated substitution elasticity tends to be significantly lower using a factor-augmenting specification (well below one). We are also able to reject conventional neutrality forms in favor of general factor augmentation with a non-negligible capital-augmenting component. Our work thus provides insights into production and supply-side estimation in balanced-growth frameworks.
  • References (17)
    17 references, page 1 of 2

    Acemoglu, D. (2007). Equilibrium bias in technology. Econometrica, 175:1371-1410.

    Jones, C. I. (2003). Growth, Capital Shares, and a New Perspective on Production Functions. Mimeo, University of California Berkeley.

    Jones, C. I. (2005). The shape of production functions and the direction of technical change. Quarterly Journal of Economics, 120(2):517-549.

    Jorgensen, D. and Yun, K.-Y. (1991). Tax Reform and the Cost of Capital. Oxford University Press.

    Jorgenson, D. W. (2001). Information technology and the US economy. American Economic Review, 91:1-32.

    Kaldor, N. (1961). Capital accumulation and economic growth. In Lutz, F. A. and Hague, D. C., editors, The Theory of Capital, pages 177-222. New York: St. Martin's Press.

    Klump, R. and de La Grandville, O. (2000). Economic growth and the elasticity of substitution: Two theorems and some suggestions. American Economic Review, 90(1):282-291.

    Klump, R., McAdam, P., and Willman, A. (2007). Factor Substitution and Factor Augmenting Technical Progress in the US. Review of Economics and Statistics, 89(1):183-92.

    Klump, R., McAdam, P., and Willman, A. (2012). The Normalized CES Production Function: Theory And Empirics. Journal of Economic Surveys, 26(5):769-799.

    Kmenta, J. (1967). On Estimation of the CES Production Function. International Economic Review, 8(2):180-189.

  • Similar Research Results (1)
  • Metrics
    0
    views in OpenAIRE
    0
    views in local repository
    56
    downloads in local repository

    The information is available from the following content providers:

    From Number Of Views Number Of Downloads
    Kent Academic Repository - IRUS-UK 0 56
Share - Bookmark