Long-Run Estimates of Interfuel and Interfactor Elasticities

48 Pages Posted: 30 Jan 2016 Last revised: 4 Feb 2016

See all articles by Chunbo Ma

Chunbo Ma

The University of Western Australia - School of Agricultural and Environment

David I. Stern

Australian National University (ANU) - Crawford School of Public Policy

Date Written: January 15, 2016

Abstract

Meta-analyses of interfuel and capital-energy elasticities of substitution show that elasticity estimates are dependent on the type of data – time series, panel, or crosssection – and the estimators used. Econometric theory suggests that the between estimator might generate the best estimates of long-run elasticities but no existing estimates of elasticities of substitution have used it. Alternatively, Chirinko et al. argued in favor of estimating long-run elasticities of substitution using a long-run difference estimator. We provide estimates of China’s interfuel and interfactor elasticities of substitution using the between and long-run difference estimators. To address potential omitted variables bias, we add province level inefficiency and national technological change terms to our regression model. The results show that demand for coal and electricity in China is very inelastic, while demand for diesel and gasoline is elastic. With the exception of gasoline and diesel, there are limited substitution possibilities among the fuels. Substitution possibilities are greater between energy and labor than between energy and capital. The results are quite different to some previous studies for China but coincide well with the patterns found in meta-analyses for long-run estimates of elasticities of substitution.

Keywords: Energy; substitution; elasticity; demand; China

JEL Classification: D24, Q40

Suggested Citation

Ma, Chunbo and Stern, David I., Long-Run Estimates of Interfuel and Interfactor Elasticities (January 15, 2016). CCEP Working Paper No. 1602, Jan 2016. Crawford School of Public Policy, The Australian National University, Available at SSRN: https://ssrn.com/abstract=2724312 or http://dx.doi.org/10.2139/ssrn.2724312

Chunbo Ma

The University of Western Australia - School of Agricultural and Environment ( email )

Nedlands, Western Australia 6907
Australia

HOME PAGE: http://www.are.uwa.edu.au/

David I. Stern (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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