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ó: The Long And Short Of It

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Author Info
Robert S. Chirinko ()

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Abstract

Research on the elasticity of substitution between capital and labor – ó – has been proceeding for 75 years. While there is clearly a strong case for the importance of ó in the analysis of growth and other economic issues, much less agreement exists on the value of ó. This paper offers some perspectives on prior estimates of ó, emphasizing the fundamental tension between the short-run data that are available and the long-run parameter that is required. Estimates of ó based on various short-run and long-run models are discussed and, while the estimates range widely, the weight of the evidence suggests a value of ó in the range of 0.40 to 0.60. There is little evidence to sustain the assumption of a Cobb-Douglas production function.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2234.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2234

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Related research
Keywords: production; function; capital formation; economic growth; estimating long-run relations;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Robert Chirinko & Debdulal Mallick, 2007. "The Fisher/Cobb-Douglas Paradox, Factor Shares, and Cointegration," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Francesco Caselli, 2005. "Accounting for Cross-Country Income Differences," CEP Discussion Papers dp0667, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  3. Gregory Mankiw, 1995. "The Growth of Nations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 275-326. [Downloadable!]
    Other versions:
  4. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February. [Downloadable!] (restricted)
  5. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1994-2), pages 1-74. [Downloadable!]
  6. Hasan Bakhshi & Nicholas Oulton & Jamie Thompson, . "Modelling investment when relative prices are trending: theory and evidence for the United Kingdom," Bank of England working papers 189, Bank of England. [Downloadable!]
  7. Robert Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2004. "That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Blackorby, Charles & Russell, R Robert, 1989. "Will the Real Elasticity of Substitution Please Stand Up? (A Comparison of the Allen/Uzawa and Morishima Elasticities)," American Economic Review, American Economic Association, vol. 79(4), pages 882-88, September. [Downloadable!] (restricted)
  9. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February. [Downloadable!] (restricted)
  10. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(1), pages 41-56, March. [Downloadable!] (restricted)
  11. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier. [Downloadable!] (restricted)
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  12. Jesus Felipe, Carsten A. Holz, 2001. "Why do Aggregate Production Functions Work? Fisher’s simulations, Shaikh’s identity and some new results," International Review of Applied Economics, Taylor and Francis Journals, vol. 15(3), pages 261-285, July. [Downloadable!] (restricted)
  13. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, vol. 73(5), pages 1066-79, December. [Downloadable!] (restricted)
  14. Farmer, Roger E A, 1997. "Money in a Real Business Cycle Model," CEPR Discussion Papers 1630, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October. [Downloadable!] (restricted)
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  16. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-20, February. [Downloadable!] (restricted)
  17. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Kaz Miyagiwa & Chris Papageorgiou, 2007. "Endogenous Aggregate Elasticity of Substitution," Emory Economics 0707, Department of Economics, Emory University (Atlanta). [Downloadable!]
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  19. Turnovsky, Stephen J., 2008. "The role of factor substitution in the theory of economic growth and income distribution: Two examples," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 604-629, June. [Downloadable!] (restricted)
  20. Robert Chirinko, 2002. "Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  21. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March. [Downloadable!] (restricted)
  22. Palivos, Theodore, 2008. "Comment on "[sigma]: The long and short of it"," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 687-690, June. [Downloadable!] (restricted)
  23. Solow, Robert M, 1974. "Law of Production and Laws of Algebra: The Humbug Production Function: A Comment," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 121, February.
  24. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October. [Downloadable!] (restricted)
  25. Barnes, Sebastian & Price, Simon & Sebastia Barriel, Maria, 2008. "The elasticity of substitution: evidence from a UK firm-level data set," Bank of England working papers 348, Bank of England. [Downloadable!]
  26. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March. [Downloadable!] (restricted)
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  27. Peter K. Clark, 1993. "Tax Incentives and Equipment Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-1), pages 317-347. [Downloadable!]
  28. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-2), pages 1-54. [Downloadable!]
  29. Schaller, Huntley, 2006. "Estimating the long-run user cost elasticity," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 725-736, May. [Downloadable!] (restricted)
  30. Colin Ellis & Simon Price, 2004. "UK Business Investment and the User Cost of Capital," Manchester School, University of Manchester, vol. 72(s1), pages 72-93, 09. [Downloadable!] (restricted)
  31. Pindyck, Robert S & Rotemberg, Julio J, 1983. " Dynamic Factor Demands under Rational Expectations," Scandinavian Journal of Economics, Blackwell Publishing, vol. 85(2), pages 223-38.
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jang-Ting Guo & Kevin J. Lansing, 2008. "Capital-labor substitution, equilibrium indeterminacy, and the cyclical behavior of labor income," Working Paper Series 2008-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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