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The elasticity of substitution: evidence from a UK firm-level data set

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  • Barnes, Sebastian

    ()
    (OECD)

  • Price, Simon

    ()
    (Bank of England)

  • Sebastia Barriel, Maria

    ()
    (Bank of England)

Abstract

Using a panel of UK firms spanning three decades, we provide estimates of the long-run elasticity of substitution between capital and other factors of production, the (negative of the) elasticity of capital and investment with respect to the user cost. The parameter is estimated using 'time averages' (with data differenced over long periods) and pooled mean group panel methods. The robust result is that the elasticity is in the region of 0.4. This is consistent with previous results obtained using aggregate UK data, and is also in line with some recent results using US firm-level data. Estimated returns to scale exceed unity. When constant returns are imposed, the estimated elasticity of substitution is not substantially changed.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 348.

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Length: 51 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:boe:boeewp:0348

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Keywords: Investment; firm-level data; elasticity of substitution; panel.;

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References

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  1. Steve Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed & Gertjan Vlieghe, 2004. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," IFS Working Papers W04/12, Institute for Fiscal Studies.
  2. Mark L.J. Wright & Esteban Rossi-Hansberg, 2004. "Firm Size Dynamics in the Aggregate Economy," 2004 Meeting Papers 878, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Nicholas Oulton, 2013. "Medium and Long Run Prospects for UK Growth in the Aftermath of the Financial Crisis," CEP Occasional Papers 37, Centre for Economic Performance, LSE.
  2. Christopher Tsoukis & Frederic Tournemaine, 2011. "Social Conflict, Growth And Factor Shares," Metroeconomica, Wiley Blackwell, vol. 62(2), pages 283-304, 05.
  3. Miles, David & Yang, Jing & Marcheggiano, Gilberto, 2011. "Optimal Bank Capital," Discussion Papers 31, Monetary Policy Committee Unit, Bank of England.
  4. Oulton, Nicholas & Sebastia-Barriel, Maria, 2013. "Long and short-term effects of the financial crisis on labour productivity, capital and output," Bank of England working papers 470, Bank of England.
  5. Pouliakas, Konstantinos & Roberts, Deborah & Balamou, Eudokia & Psaltopoulos, Dimitris, 2008. "Modelling the Effects of Immigration on Regional Economic Performance and the Wage Distribution: A CGE Analysis of Three EU Regions," MPRA Paper 14157, University Library of Munich, Germany.
  6. Jochen Schanz & David Aikman & Paul Collazos & Marc Farag & David Gregory & Sujit Kapadia, 2011. "The long-term economic impact of higher capital levels," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 73-81 Bank for International Settlements.
  7. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo Group Munich.
  8. Lynne Cockerell & Steven Pennings, 2007. "Private Business Investment in Australia," RBA Research Discussion Papers rdp2007-09, Reserve Bank of Australia.

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