Identifying the Elasticity of Substitution with Biased Technical Change

By M. León-Ledesma, Peter Mcadam, Alpo Willman. Social Science Research Network, 2010

452 citations recorded by the source corpus.

The capital-labor substitution elasticity and technical biases in production are critical parameters. The received wisdom claims their joint identification is infeasible. We challenge that interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that jointly modeling the production function and first-order conditions is superior to single-equation approaches especially when merged with "normalization." Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and variability underlying past empirical studies. (JEL E22, O33, O41)

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/f535fc56810f3f3a01bb042e1d780eeab4a6bd3d

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In Economics and Econometrics

1. C. Cantore
2. Paul Levine
3. Patrick Schulte
4. Marianne Saam
5. Robert Z. Lawrence
6. C. Papageorgiou
7. J. Álvarez
8. Esteban Rossi-Hansberg

Citations in the corpus

• Getting Normalization Right: Dealing with ‘Dimensional Constants’ in Macroeconomics (2012, methodology): “Recently there is an increasingly empirical evidence going in favour of CES production functions, in particular at business cycle frequencies, with elasticity of substitution well below unity (e.g., Klump et al. (2007), Chirinko (2008) and León-Ledesma et al. (2010)).”
• Scale economies and input price elasticities in microfinance institutions (2013, unknown): “8 estimation, especially when combined with normalization, which we do using the price of (physical) capital (León-Ledesma et al., 2010).”
• Elasticity of Substitution between Clean and Dirty Energy Inputs - A Macroeconomic Perspective (2013, methodology): “Since CES functions are highly nonlinear and hard to identify (León-Ledesma, McAdam, and Willman 2010a), we use linear translog approximations as robustness checks.”
• The Normalized CES Production Function: Theory and Empirics (2011, unknown): “Indeed, there is now mounting empirical evidence that aggregate production is better characterized by a non-unitary elasticity of substitution (rather than unitary or above unitary), e.g., Chirinko et al. (1999), Klump et al. (2007a), León-Ledesma et al. (2010a).”
• Sectoral Technology and Structural Transformation (2015, unknown): “León-Ledesma et al. (2010) demonstrated that in practice this way of proceeding simplifies the estimation of the other parameters.”
• The Global Decline of the Labor Share (2014, unknown): “Leon-Ledesma, McAdam, and Willman (2010) attribute some of the large variation in the estimates of the elasticity to the use of a single equation first-order condition rather than a joint estimation with the production function.”
• Recent Declines in Labor's Share in US Income: A Preliminary Neoclassical Account (2015, methodology): “León-Ledesma et al. (2010) demonstrate using Monte-Carlo methods that this combination of normalization and jointly modeling the production function and first order conditions produces superior estimates.”