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Elasticity of substitution between public and private capital: Evidence from manufacturing firms in Europe

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  • An, Zidong
  • Zhang, Feinan
  • Li, Haibo

Abstract

Most macroeconomic models either assume that public and private capital are perfectly substitutable in the production process or they are combined under a Cobb–Douglas type production function. Using post-crisis data from European manufacturing firms, this letter finds the elasticity of substitution between public and private capital to be 3.45, suggesting these widely used assumptions are invalid. Besides, firms with higher dependence on external financing tend to have a higher elasticity of substitution.

Suggested Citation

  • An, Zidong & Zhang, Feinan & Li, Haibo, 2022. "Elasticity of substitution between public and private capital: Evidence from manufacturing firms in Europe," Economics Letters, Elsevier, vol. 219(C).
    • Handle: RePEc:eee:ecolet:v:219:y:2022:i:c:s0165176522002828
    DOI: 10.1016/j.econlet.2022.110780
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    References listed on IDEAS

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    Cited by:

    1. Julien, Ludovic A., 2023. "A formula for the elasticity of substitution of a large class of smooth utility functions," Economics Letters, Elsevier, vol. 229(C).

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    More about this item

    Keywords

    Elasticity of substitution; Production function; Public capital; Crowd-in effect;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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