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Econometric Estimation of the “Constant Elasticity of Substitution" Function in R: Package micEconCES

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Author Info

  • Arne Henningsen

    ()
    (Institute of Food and Resource Economics, University of Copenhagen)

  • Géraldine Henningsen

    ()
    (Risø National Laboratory for Sustainable Energy, Technical University of Denmark)

Abstract

The Constant Elasticity of Substitution (CES) function is popular in several areas of economics, but it is rarely used in econometric analysis because it cannot be estimated by standard linear regression techniques. We discuss several existing approaches and propose a new grid-search approach for estimating the traditional CES function with two inputs as well as nested CES functions with three and four inputs. Furthermore, we demonstrate how these approaches can be applied in R using the add-on package micEconCES and we describe how the various estimation approaches are implemented in the micEconCES package. Finally, we illustrate the usage of this package by replicating some estimations of CES functions that are reported in the literature.

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File URL: http://okonomi.foi.dk/workingpapers/WPpdf/WP2011/WP_2011_9_econometric_estimation_CES.pdf
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Bibliographic Info

Paper provided by University of Copenhagen, Department of Food and Resource Economics in its series IFRO Working Paper with number 2011/9.

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Length: 107 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:foi:wpaper:2011_9

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Keywords: constant elasticity of substitution; CES; nested CES; R;

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References

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  1. Mishra, SK, 2006. "A Note on Numerical Estimation of Sato’s Two-Level CES Production Function," MPRA Paper 1019, University Library of Munich, Germany, revised 02 Dec 2006.
  2. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
  3. León-Ledesma, Miguel A. & McAdam, Peter & Willman, Alpo, 2009. "Identifying the elasticity of substitution with biased technical change," Working Paper Series, European Central Bank 1001, European Central Bank.
  4. Winford H. Masanjala & Chris Papageorgiou, 2004. "The Solow model with CES technology: nonlinearities and parameter heterogeneity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 19(2), pages 171-201.
  5. Arne Henningsen & Jeff D. Hamann, . "systemfit: A Package for Estimating Systems of Simultaneous Equations in R," Journal of Statistical Software, American Statistical Association, American Statistical Association, vol. 23(i04).
  6. Katharine M. Mullen & David Ardia & David L. Gil & Donald Windover & James Cline, . "DEoptim: An R Package for Global Optimization by Differential Evolution," Journal of Statistical Software, American Statistical Association, American Statistical Association, vol. 40(i06).
  7. Chris Papageorgiou & Marianne Saam, 2008. "Two-level CES Production Technology in the Solow and Diamond Growth Models," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 110(1), pages 119-143, 03.
  8. Kemfert, Claudia, 1998. "Estimated substitution elasticities of a nested CES production function approach for Germany," Energy Economics, Elsevier, Elsevier, vol. 20(3), pages 249-264, June.
  9. Klump, Rainer & Papageorgiou, Chris, 2008. "Editorial introduction The CES production function in the theory and empirics of economic growth," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(2), pages 599-600, June.
  10. Pandey, Manish, 2008. "Human capital aggregation and relative wages across countries," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(4), pages 1587-1601, December.
  11. Richard Anderson & William Greene & B. D. McCullough & H. D. Vinod, 2008. "The role of data/code archives in the future of economic research," Journal of Economic Methodology, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(1), pages 99-119.
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Citations

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Cited by:
  1. Henningsen, Arne & Henningsen, Géraldine, 2012. "On estimation of the CES production function—Revisited," Economics Letters, Elsevier, Elsevier, vol. 115(1), pages 67-69.
  2. Keting Shen & John Whalley, 2013. "Capital-Labor-Energy Substitution in Nested CES Production Functions for China," NBER Working Papers 19104, National Bureau of Economic Research, Inc.
  3. DURAND-LASSERVE, Olivier & Pierru , Axel & SMEERS, Yves, 2012. "Sensitivity of policy simulation to benchmark scenarios in CGE models: illustration with carbon leakage," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2012063, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Koesler, Simon & Schymura, Michael, 2012. "Substitution elasticities in a CES production framework: An empirical analysis on the basis of non-linear least squares estimations," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 12-007, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Idrovo Aguirre, Byron, 2012. "Inversión en infraestructura pública y crecimiento económico, evidencia para Chile
    [Public infrastructure, investment and economic growth in Chile]
    ," MPRA Paper 39857, University Library of Munich, Germany.
  6. Simon Koesler & Michael Schymura, 2012. "Substitution Elasticities for CGE Models," EcoMod2012 4010, EcoMod.

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