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Is the production function Translog or CES? An empirical illustration using UK data

Elena Lagomarsino () and Karen Turner ()
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Karen Turner: Centre for Energy Policy, University of Strathclyde

No 1713, Working Papers from University of Strathclyde Business School, Department of Economics

Abstract: Computable general equilibrium (CGE) studies are increasingly in-terested in informing keys parameters of their models using empirical data. Energy and environmental CGE ndings have been found to be particularly sensible to changes in the values of the elasticities of substitution between inputs of production. Although applied econometric literature provides numerous estimates of substitution elasticities obtained from fexible functional forms cost or production functions, the number of papers dealing with Constant Elasticities of Substitution (CES) production functions, generally favoured in a CGE framework, is still limited. The contribution of this paper is to estimate the substitution relationship between energy and other inputs for the United Kingdom using a new approach that allows to understand whether a nested CES production function is adequate to describe the true input-output relationship. Moreover, the approach can be used to obtain an indication on which nested structure should is the most appropriate for the data considered. Findings suggest that the analysed dataset might support a four-input nested CES production function where the energy-capital are combined in an inner nest.

Keywords: elasticities of substitution; Translog production function; nested CES; input separability; general equilibrium (search for similar items in EconPapers)
JEL-codes: D24 C68 D58 R15 Q43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-eff
Date: 2017-11
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