Identifying the Elasticity of Substitution with Biased Technical Change
50 Pages Posted: 5 Feb 2009
Date Written: January 28, 2009
Abstract
Despite being critical parameters in many economic fields, the received wisdom, in theoretical and empirical literatures, states that joint identification of the elasticity of capital-labor substitution and technical bias is infeasible. This paper challenges that pessimistic interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that the jointly modeling the production function and first-order conditions is superior to single-equation approaches in terms of robustly capturing production and technical parameters, especially when merged with "normalization". Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and the variability underlying past empirical studies.
Keywords: Constant Elasticity of Substitution, Factor-Augmenting Technical Change, Normalization, Factor Income share, Identification, Monte Carlo
JEL Classification: C22, E23, O30, 051
Suggested Citation: Suggested Citation
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