Estimating elasticities of substitution with nested CES production functions: Where do we stand?

Elena Lagomarsino

Energy Economics, 2020, vol. 88, issue C

Abstract: Prompt by an increasing interest by climate change modelers, a rich literature estimating elasticities of substitution in a nested CES production framework has recently developed. This article reviews such literature. We critically describe the nesting structures, estimation approaches, data sources and aggregation, econometric techniques, and types of substitution elasticities used by previous literature, to offer a comprehensive description of the various options available to a researcher attempting this estimation. We also provide suggestions for potential improvements to the estimation process. In particular, we warn researchers to use CES production functions with caution in empirical applications given their restrictive build-in assumptions.

Keywords: KLEM production functions; Substitution elasticities; Energy and capital substitution estimation; Nested CES (search for similar items in EconPapers)
JEL-codes: C13 D24 D58 Q40 Q48 Q50 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:88:y:2020:i:c:s0140988320300918

DOI: 10.1016/j.eneco.2020.104752

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