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

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  • Saara Tamminen
  • Tuomaala
  • Eljas
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    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.

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    Bibliographic Info

    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 34.

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    Date of creation: 03 Jul 2012
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    Handle: RePEc:fer:wpaper:34

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    Keywords: Elasticity of substitution; price elasticity; micro panel data; translogcost function; sector specific; CGE models;

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    1. Mark J. Koetse & Henri L.F. de Groot & Raymond J.G.M. Florax, 2006. "Capital-Energy Substitution and Shifts in Factor Demand: A Meta-Analysis," Tinbergen Institute Discussion Papers 06-061/3, Tinbergen Institute.
    2. Jalava Jukka & Pohjola Matti & Ripatti Antti & Vilmunen Jouko, 2006. "Biased Technical Change and Capital-Labour Substitution in Finland, 1902-2003," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-20, April.
    3. Raj Chetty & Adam Guren & Day Manoli & Andrea Weber, 2011. "Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins," American Economic Review, American Economic Association, vol. 101(3), pages 471-75, May.
    4. Truett, Lila J. & Truett, Dale B., 2007. "A cost-based analysis of scale economies in the French auto industry," International Review of Economics & Finance, Elsevier, vol. 16(3), pages 369-382.
    5. Arnberg, Soren & Bjorner, Thomas Bue, 2007. "Substitution between energy, capital and labour within industrial companies: A micro panel data analysis," Resource and Energy Economics, Elsevier, vol. 29(2), pages 122-136, May.
    6. Alan D. Woodland, 1993. "A Micro-Econometric Analysis of the Industrial Demand for Energy in NSW," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 57-90.
    7. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    8. Rouvinen, Petri, 1999. "R&D Spillovers among Finnish Manufacturing Firms: A Cost Function Estimation with Random Coefficients," Discussion Papers 686, The Research Institute of the Finnish Economy.
    9. Nguyen, Sang V & Streitwieser, Mary L, 1999. " Factor Substitution in U.S. Manufacturing: Does Plant Size Matter?," Small Business Economics, Springer, vol. 12(1), pages 41-57, February.
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