Variation in price and substitution elasticities between sectors – A microdata analysis

Saara Tamminen and Eljas Tuomaala

No 34, Working Papers from VATT Institute for Economic Research

Abstract: The purpose of this study is to determine the substitution and price elasticities of different production inputs in numerous sectors in order to reveal how much these elasticities vary between sectors. These elasticities will be also used in practice in a vast CGE model. With 71 sectors studied, our study covers more sectors than previous literature and includes both manufacturing and services sectors. The analysis is based on a vast company level micro database from year 2000 to 2009. We use two alternative translog-cost function specifications for the estimation of the elasticities and apply seemingly unrelated regressions (SUR) with fixed effects on the panel data. In total we estimate 142 SUR regressions. We find that while the elasticities tend to concentrate around the same level in many sectors, there are also significant differences both in the substitution elasticities and in the own-price elasticities of various input factors between different sectors. However, the elasticities are not found to differ significantly between the manufacturing sectors and services sectors in general. Due to the significant variation between sectors, sector specific elasticities are recommended to be used in computable general equilibrium models and in other applied economic models that are sensitive to these types of elasticities.

Keywords: Elasticity of substitution, price elasticity, micro panel data, translogcost function, sector specific, CGE models, Macroeconomic policy, Talouspolitiikka, Labour market, Työmarkkinat, Policy analysis and modelling, Päätöksenteon tuki ja mallintaminen, D240 - Production; Capital and Total Factor Productivity; Capacity, D330 - Factor Income Distribution, D580 - Computable and Other Applied General Equilibrium Models, (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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