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Which nesting structure for the CES? A new selection approach based on input separability

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  • Lagomarsino, Elena

Abstract

Nested CES production functions are very popular in economic applications, but their empirical validity has been questioned. In this paper, we outline a simple method that can be used to test whether a given dataset is consistent with a CES production technology and that informs on which nesting structure describes it more closely. The method is based on empirical testing input separability conditions, derived for all the feasible 3-input and 4-input nested CES. A Monte Carlo simulation environment is exploited to assess the accuracy of the test.

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  • Lagomarsino, Elena, 2021. "Which nesting structure for the CES? A new selection approach based on input separability," Economic Modelling, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:ecmode:v:102:y:2021:i:c:s0264999321001516
    DOI: 10.1016/j.econmod.2021.105562
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    More about this item

    Keywords

    Nested CES; Production function; Input separability; Nesting structures; Taylor approximation; Translog;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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