Non-Balanced Growth and Production Technology Estimation

Miguel Leon-Ledesma, Peter McAdam () and Alpo Willman

Studies in Economics from School of Economics, University of Kent

Abstract: Capital-labor substitution and TFP estimates are essential features of many economic models. Such models typically embody a balanced growth path. This often leads researchers to estimate models imposing stringent prior choices on technical change. We demonstrate that estimation of the substitution elasticity and TFP growth can be substantially biased if technical progress is thereby mis-specified. We obtain analytical and simulation results in the context of a model consistent with balanced and near-balanced growth (i.e. departures from balanced growth but broadly stable factor shares). Given this evidence, a Constant Elasticity of Substitution production function system is then estimated for the US economy. Results show that the estimated substitution elasticity tends to be significantly lower using a factor-augmenting specification (well below one). We are also able to reject conventional neutrality forms in favor of general factor augmentation with a non-negligible capital-augmenting component. Our work thus provides insights into production and supply-side estimation in balanced-growth frameworks.

Keywords: Balanced Growth; Technical Progress Neutrality; Factor Income share; Constant Elasticity of Substitution; Factor-Augmenting Technical Change (search for similar items in EconPapers)
JEL-codes: C15 C32 E23 O33 O51 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (6)

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