ISOELASTIC ELASTICITY OF SUBSTITUTION PRODUCTION FUNCTIONS

Jakub Growiec and Jakub Mućk

Macroeconomic Dynamics, 2020, vol. 24, issue 7, 1597-1634

Abstract: We generalize the normalized constant elasticity of substitution (CES) production function by allowing the elasticity of substitution to vary isoelastically with (i) the relative factor share, (ii) the marginal rate of substitution, (iii) the capital–labor ratio, (iv) the capital share, (v) the capital’s rate of return, or (vi) the capital–output ratio. Ensuing isoelastic elasticity of substitution (IEES) functions have intuitively and analytically desirable properties, for example, self-duality. Empirically, for the post-war US economy we robustly reject the CES specification in favor of the IEES alternative. Assuming the IEES production structure we find that the capital–labor elasticity of substitution has remained around 0.8–0.9 from 1948 to the 1980s, followed by a period of secular decline.

Date: 2020
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Related works:
Working Paper: Isoelastic Elasticity of Substitution Production Functions (2016)
Working Paper: Isoelastic Elasticity of Substitution Production Functions (2015)
Working Paper: Isoelastic elasticity of substitution production functions (2015)
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