Another Look at Panel Estimates of the Elasticity of Substitution between Capital and Labor

Marcelo Mello

Brazilian Review of Econometrics, 2017, vol. 37, issue 2

Abstract: We construct a broad panel with aggregate data for 94 countries over the period 1970-2014 from the latest version of the Penn World Tables (PWT) dataset, version 9.0. We estimate the elasticity of substitution between capital and labor based on the linearization of a Constant Elasticity of Substitution (CES) production function. In our preferred econometric specification, we find estimates of the elasticity of substitution that are below one. We obtain the same result when we correct the variables for cross-country differences in human capital. Additionally, estimation of a linearized CES for alternative panels constructed with data from older versions of the PWT corroborate our initial estimates. The finding that the elasticity of substitution is below one casts doubts on the Cobb-Douglas assumption commonly adopted in development accounting exercises, as well as on the recent literature on declining labor shares which assumes that the elasticity of substitution is above one.

Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://periodicos.fgv.br/bre/article/view/72552 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sbe:breart:v:37:y:2017:i:2:a:72552

Access Statistics for this article

Brazilian Review of Econometrics is currently edited by Daniel Monte

More articles in Brazilian Review of Econometrics from Sociedade Brasileira de Econometria - SBE Contact information at EDIRC.
Bibliographic data for series maintained by Núcleo de Computação da FGV EPGE ().