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Variation in price and substitution elasticities between sectors – A microdata analysis

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  • Tamminen, Saara
  • Tuomaala, Eljas

Abstract

The purpose of this study is to determine the substitution and price elasticities of different production inputs in numerous sectors in order to reveal how much these elasticities vary between sectors. These elasticities will be also used in practice in a vast CGE model. With 71 sectors studied, our study covers more sectors than previous literature and includes both manufacturing and services sectors. The analysis is based on a vast company level micro database from year 2000 to 2009. We use two alternative translog-cost function specifications for the estimation of the elasticities and apply seemingly unrelated regressions (SUR) with fixed effects on the panel data. In total we estimate 142 SUR regressions. We find that while the elasticities tend to concentrate around the same level in many sectors, there are also significant differences both in the substitution elasticities and in the own-price elasticities of various input factors between different sectors. However, the elasticities are not found to differ significantly between the manufacturing sectors and services sectors in general. Due to the significant variation between sectors, sector specific elasticities are recommended to be used in computable general equilibrium models and in other applied economic models that are sensitive to these types of elasticities.

Suggested Citation

  • Tamminen, Saara & Tuomaala, Eljas, 2012. "Variation in price and substitution elasticities between sectors – A microdata analysis," Working Papers 34, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:34
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    File URL: https://www.doria.fi/handle/10024/148773
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    Cited by:

    1. Sebastian M. Deininger & Lukas Mohler & Daniel Mueller, 2018. "Factor substitution in Swiss manufacturing: empirical evidence using micro panel data," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 154(1), pages 1-15, December.

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