The elasticity of substitution: evidence from a UK firm-level data set

Sebastian Barnes (), Simon Price () and Maria Sebastia Barriel ()
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Sebastian Barnes: OECD
Maria Sebastia Barriel: Bank of England, Postal: Threadneedle Street London EC2R 8AH

No 348, Bank of England working papers from Bank of England

Abstract: Using a panel of UK firms spanning three decades, we provide estimates of the long-run elasticity of substitution between capital and other factors of production, the (negative of the) elasticity of capital and investment with respect to the user cost. The parameter is estimated using 'time averages' (with data differenced over long periods) and pooled mean group panel methods. The robust result is that the elasticity is in the region of 0.4. This is consistent with previous results obtained using aggregate UK data, and is also in line with some recent results using US firm-level data. Estimated returns to scale exceed unity. When constant returns are imposed, the estimated elasticity of substitution is not substantially changed.

Keywords: Investment; firm-level data; elasticity of substitution; panel. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-eff
Date: 2008-04
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