Estimating the elasticity of substitution: An index-number approach

Eliyathamby A. Selvanathan, Kenneth W. Clements and Saroja Selvanathan

The Journal of International Trade & Economic Development, 2025, vol. 34, issue 6, 1378-1393

Abstract: This paper presents a new way to estimate the constant elasticity of substitution $ (\sigma ). $ (σ). We show that the link between $ \sigma $ σ and Divisia index numbers gives rise to a revealing way to obtain preliminary estimates of $ \sigma $ σ. This approach, which is related to stochastic index numbers, is illustrated with time-series and cross-country data. Using consumption data for 12 commodities over time from 23 European countries, we obtain 400 + estimates of $ \sigma $ σ, which mostly lie between 0 and 1. The cross-country estimates are broadly similar. Extensions of the approach to deal with endogenous prices and non-homothetic demand are also considered.

Date: 2025
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DOI: 10.1080/09638199.2024.2382290

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