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Estimating elasticities of substitution with nested CES production functions: Where do we stand?

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  • Lagomarsino, Elena

Abstract

Prompt by an increasing interest by climate change modelers, a rich literature estimating elasticities of substitution in a nested CES production framework has recently developed. This article reviews such literature. We critically describe the nesting structures, estimation approaches, data sources and aggregation, econometric techniques, and types of substitution elasticities used by previous literature, to offer a comprehensive description of the various options available to a researcher attempting this estimation. We also provide suggestions for potential improvements to the estimation process. In particular, we warn researchers to use CES production functions with caution in empirical applications given their restrictive build-in assumptions.

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  • Lagomarsino, Elena, 2020. "Estimating elasticities of substitution with nested CES production functions: Where do we stand?," Energy Economics, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:eneeco:v:88:y:2020:i:c:s0140988320300918
    DOI: 10.1016/j.eneco.2020.104752
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    More about this item

    Keywords

    KLEM production functions; Substitution elasticities; Energy and capital substitution estimation; Nested CES;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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