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Features of the production factors substitution and the estimated parameters of the Cobb-Douglas function with constant returns to scale and disembodied technical change

Florin Pavelescu ()

Romanian Journal of Economics, 2017, vol. 45, issue 2(54), 134-152

Abstract: The paper shows that, if the OLS method is used, the features of substitution between the considered production factors have an important impact on the estimated parameters of the Cobb-Douglas production function with constant returns to scale and disembodied technical change as well as on the dynamics of the total factor productivity. The author reveals the dual nature of the above-mentioned production function and identifies all the possible correlations of the estimated parameters when productivity of labour tends to grow in the long run. A special attention is paid to the possible occurence of harmful collinearity. The author reveals that the occurence of the respective type of collinearity type is dependent on the feature of the dynamics of productivity of the substituting production factor. Consequently, an extended estimation methodology is proposed in order to reveal the feature of the production factors substitution, the form of the trajectory o f thedynamics of the partial productivity of the considered production factors and the impact of colinearity on the estimated parameters. This methodology is practically used by considering the evolution of Japan`s economy during the 1971-1986 period.

Keywords: productivity function; representative index; total factor productivity; capital deeping; substituting production factor; harmful collinearity. (search for similar items in EconPapers)
JEL-codes: C13 C18 C22 C25 C51 E24 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:ine:journl:v:45:y:2017:i:54:p:134-152