Identifying the elasticity of substitution with biased technical change

Peter McAdam (), Alpo Willman and Miguel Leon-Ledesma

No 1001, Working Paper Series from European Central Bank

Abstract: Despite being critical parameters in many economic fields, the received wisdom, in theoretical and empirical literatures, states that joint identification of the elasticity of capital-labor substitution and technical bias is infeasible. This paper challenges that pessimistic 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 the jointly modeling the production function and first-order conditions is superior to single-equation approaches in terms of robustly capturing production and technical parameters, 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 the variability underlying past empirical studies. JEL Classification: C22, E23, O30, O51

Keywords: Constant Elasticity of Substitution; factor-augmenting technical change; Factor Income share; identification; Monte Carlo.; normalization (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-ecm and nep-eff
Note: 50336
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1001.pdf (application/pdf)

Related works:
Journal Article: Identifying the Elasticity of Substitution with Biased Technical Change (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091001

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().