Elasticity of Substitution between Capital and Labor and its applications to growth and development

Samuel Pessoa (pessoa@fgv.br), Silvia Pessoa (smatos@econ.ssc.upenn.edu) and Rafael Rob (rrob@econ.sas.upenn.edu)
Additional contact information
Samuel Pessoa: Graduate School of Economics, Fundacao Getulio Vargas
Silvia Pessoa: Department of Economics, University of Pennsylvania
Rafael Rob: Department of Economics, University of Pennslyvania
Authors registered in the RePEc Author Service: Rafael Robb

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper estimates the elasticity of substitution of an aggregate production function. The estimating equation is derived from the steady state of a neoclassical growth model. The data comes from the PWT in which different countries face different relative prices of the investment good and exhibit different investment-output ratios. Then, taking advantage of this variation we estimate the long-run elasticity of substitution. Using various estimation techniques, we find that the elasticity of substitution is 0.7, which is lower than the elasticity, 1, that is traditionally used in macro-development exercises. We show that this lower elasticity reinforces the power of the neoclassical model to explain income differences across countries as coming from differential distortions.

Keywords: Demand for Investment; Dynamic Panel Data; Elasticity of Substitution (search for similar items in EconPapers)
JEL-codes: D24 D33 E25 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2005-03-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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