Which nesting structure for the CES? A new selection approach based on input separability

Elena Lagomarsino

Economic Modelling, 2021, vol. 102, issue C

Abstract: Nested CES production functions are very popular in economic applications, but their empirical validity has been questioned. In this paper, we outline a simple method that can be used to test whether a given dataset is consistent with a CES production technology and that informs on which nesting structure describes it more closely. The method is based on empirical testing input separability conditions, derived for all the feasible 3-input and 4-input nested CES. A Monte Carlo simulation environment is exploited to assess the accuracy of the test.

Keywords: Nested CES; Production function; Input separability; Nesting structures; Taylor approximation; Translog (search for similar items in EconPapers)
JEL-codes: C12 C15 C52 C68 D24 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001516

DOI: 10.1016/j.econmod.2021.105562

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