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Think Again: Higher Elasticity of Substitution Increases Economic Resilience

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  • P. Dumas

    (Centre International de Recherche sur l’Environnement et le Développement (CIRED))

  • S. Hallegatte

    (Ecole Nationale de la Météorologie, Météo-France and CIRED)

Abstract

This paper shows that, counter-intuitively, a higher elasticity of substitution in model production function can lead to reduced economic resilience and larger vulnerability to shocks in production factor prices. This result is due to the fact that assuming a higher elasticity of substitution requires a recalibration of the production function parameters to keep the model initial state unchanged. This result has consequences for economic analysis, e.g., on the economic vulnerability to climate change.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2009.66.

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Date of creation: Aug 2009
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Handle: RePEc:fem:femwpa:2009.66

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Keywords: Substitution; Calibration; Constant Elasticity of Substitution; Shock;

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  1. Magnus, J.R., 1979. "Substitution between energy and non-energy inputs in the Netherlands, 1950-1976," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153206, Tilburg University.
  2. Manuel Frondel & Christoph M. Schmidt, 2002. "The Capital-Energy Controversy: An Artifact of Cost Shares?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 53-79.
  3. Magnus, Jan R, 1979. "Substitution between Energy and Non-Energy Inputs in the Netherlands, 1950-1976," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 465-84, June.
  4. Klump, Rainer & Saam, Marianne, 2006. "Calibration of normalised CES production functions in dynamic models," ZEW Discussion Papers 06-78, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Kemfert, Claudia & Welsch, Heinz, 2000. "Energy-Capital-Labor Substitution and the Economic Effects of CO2 Abatement: Evidence for Germany," Journal of Policy Modeling, Elsevier, vol. 22(6), pages 641-660, November.
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