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The Elasticities of Complementarity and Substitution

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  • Peter Broer

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

This paper argues that the conventional definition of the elasticity of complementarity is not well suited to deal with the case of increasing returns. It proposes a slightly different formula, that uses a distance function formulation instead of a production function. The proposed definition coincides with the Hicksian measure in case the production function displays constant returns. It is more informative in case returns to scale are not constant, as it disentangles entry effects and substitution effects of factor supplies. The new definition is also preferable in that it is fully symmetric with the definition of the elasticity of substitution.

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File URL: http://papers.tinbergen.nl/04101.pdf
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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-101/1.

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Date of creation: 14 Sep 2004
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Handle: RePEc:dgr:uvatin:20040101

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Web page: http://www.tinbergen.nl

Related research

Keywords: distance function; elasticity of complementarity; returns to scale; tangency condition;

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  1. Sato, Ryuzo & Koizumi, Tetsunori, 1973. "On the Elasticities of Substitution and Complementarity," Oxford Economic Papers, Oxford University Press, vol. 25(1), pages 44-56, March.
  2. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  3. Blanchard, Olivier Jean & Summers, Lawrence H, 1988. "Beyond the Natural Rate Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 182-87, May.
  4. Deaton, Angus, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 46(3), pages 391-405, July.
  5. Hicks, John, 1970. "Elasticity of Substitution Again: Substitutes and Complements," Oxford Economic Papers, Oxford University Press, vol. 22(3), pages 289-96, November.
  6. Syrquin, Moshe & Hollender, Gideon, 1982. "Elasticities of Substitution and Complementarity: The General Case," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 515-19, November.
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Cited by:
  1. Stern, David I., 2009. "Interfuel Substitution: A Meta-Analysis," MPRA Paper 13734, University Library of Munich, Germany.
  2. Bas Jacobs & A. Lans Bovenberg, 2011. "Optimal Taxation of Human Capital and the Earnings Function," Journal of Public Economic Theory, Association for Public Economic Theory, Association for Public Economic Theory, vol. 13(6), pages 957-971, December.
  3. Stern, David I, 2008. "Elasticities of Substitution and Complementarity," MPRA Paper 12454, University Library of Munich, Germany.

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