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Identifying the elasticity of substitution with biased technical change

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  • León-Ledesma, Miguel A.
  • McAdam, Peter
  • Willman, Alpo

Abstract

Despite being critical parameters in many economic fields, the received wisdom, in theoretical and empirical literatures, states that joint identification of the elasticity of capital-labor substitution and technical bias is infeasible. This paper challenges that pessimistic interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that the jointly modeling the production function and first-order conditions is superior to single-equation approaches in terms of robustly capturing production and technical parameters, especially when merged with "normalization". Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and the variability underlying past empirical studies. JEL Classification: C22, E23, O30, 051

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1001.

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Date of creation: Jan 2009
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Handle: RePEc:ecb:ecbwps:20091001

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Keywords: Constant Elasticity of Substitution; Factor Income share; Factor-Augmenting Technical Change; Identification; Monte Carlo; Normalization;

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