Isoelastic Elasticity of Substitution Production Functions

Jakub Growiec and Jakub Mućk

No 2016-001, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: We generalize the normalized Constant Elasticity of Substitution (CES) production function by allowing the elasticity of substitution to vary isoelastically with (i) relative factor shares, (ii) marginal rates of substitution, (iii) capital–labor ratios, or (iv) capital–output ratios. Ensuing four variants of Isoelastic Elasticity of Substitution (IEES) production functions have a range of intuitively desirable properties and yield empirically testable predictions for the functional relationship between relative factor shares and (raw or technology-adjusted) capital–labor ratios. As an empirical application, the parameters of IEES functions are estimated in a three-equation supply-side system with factor-augmenting technical change, based on data on aggregate production in the post-war US economy. Our estimates consistently imply that the elasticity of substitution between capital and labor has remained relatively stable, at about 0.8–0.9, from 1948 to the 1980s, followed by a period of secular decline.

Keywords: production function; factor share; elasticity of substitution; marginal rate of substitution; normalization (search for similar items in EconPapers)
JEL-codes: E23 E25 O33 O47 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-03
New Economics Papers: this item is included in nep-eff and nep-mac
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http://hdl.handle.net/20.500.12182/1081 (application/pdf)

Related works:
Journal Article: ISOELASTIC ELASTICITY OF SUBSTITUTION PRODUCTION FUNCTIONS (2020)
Working Paper: Isoelastic Elasticity of Substitution Production Functions (2015)
Working Paper: Isoelastic elasticity of substitution production functions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2016001

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