That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity

By Robert S. Chirinko, Steven M. Fazzari, Andrew P. Meyer. Social Science Research Network, 2004

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The elasticity of substitution between capital and labor features prominently in several areas of economic research. However, a consensus estimate remains elusive. We develop an estimation strategy that filters panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/ca50399b4315b557f3f8eb42c74db42b75c3d557