A New Approach to Estimating Production Function Parameters: The Elusive Capital--Labor Substitution Elasticity

Bob Chirinko, Steven Fazzari and Andrew P. Meyer

Journal of Business & Economic Statistics, 2011, vol. 29, issue 4, 587-594

Abstract: Parameters of taste and technology are central to a wide variety of economic models and issues. This article proposes a simple method for estimating production function parameters from panel data, with a particular focus on the elasticity of substitution between capital and labor. Elasticity estimates have varied widely, and a consensus estimate remains elusive. Our estimation strategy exploits long-run variation and thus avoids several pitfalls, including difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules, that can bias the estimated elasticity. Our results are based on an extensive panel comprising 1860 firms. Our approach generates a precisely estimated elasticity of 0.40. Although existing estimates range widely, we document a remarkable convergence of results from two related approaches applied to a common dataset. The method developed here may prove useful in estimating other structural parameters from panel datasets.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:29:y:2011:i:4:p:587-594

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DOI: 10.1198/jbes.2011.08119

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