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Accounting for Productivity: Is it OK to Assume that the World is Cobb-Douglas?

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  • Shekhar Aiyar

    (International Monetary Fund)

  • Carl-Johan Dalgaard

    (Department of Economics, University of Copenhagen)

Abstract

The development accounting literature almost always assumes a Cobb-Douglas (CD) production function. However, if in reality the elasticity of substitution between capital and labor deviates substantially from 1, the assumption is invalid, potentially casting doubt on the commonly held view that factors of production are relatively unimportant in accounting for differences in labor productivity. We use international data on relative factor shares and capital-output ratios to formulate a number of tests for the validity of the CD assumption. We find that the CD specification performs reasonably well for the purposes of cross-country productivity accounting.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 08-14.

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Length: 19 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:kud:kuiedp:0814

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  1. Carl-Johan Dalgaard & Martin Kaae Jensen, 2007. "Life Cycle Savings, Bequest, and the Diminishing Impact of Scale on Growth," Discussion Papers 07-17, University of Copenhagen. Department of Economics.
  2. Hendricks, Lutz A., 2002. "How Important is Human Capital for Development? Evidence from Immigrant Earnings," Staff General Research Papers 11409, Iowa State University, Department of Economics.
  3. Diego Restuccia, 2004. "Barriers to Capital Accumulation and Aggregate Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 225-238, 02.
  4. Ben S. Bernanke & Kenneth Rogoff, 2001. "NBER Macroeconomics Annual 2000, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number bern01-1, July.
  5. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
  6. Daron Acemoglu, 2000. "Labor- and Capital- Augmenting Technical Change," NBER Working Papers 7544, National Bureau of Economic Research, Inc.
  7. Chris Papageorgiou & Fidel Pérez Sebastián & John Duffy, 2002. "Capital-Skill Complementarity? Evidence From A Panel Of Countries," Working Papers. Serie AD 2002-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Shekhar Aiyar & Carl-Johan Dalgaard, 2005. "Total Factor Productivity Revisited: A Dual Approach to Development Accounting," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 82-102, April.
  9. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  10. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," CEPR Discussion Papers 1350, C.E.P.R. Discussion Papers.
  11. Diamond, Peter & McFadden, Daniel & Rodriguez, Miguel, 1978. "Measurement of the Elasticity of Factor Substitution and Bias of Technical Change," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 2, chapter 5 McMaster University Archive for the History of Economic Thought.
  12. Charles I. Jones & Dean Scrimgeour, 2008. "A New Proof of Uzawa's Steady-State Growth Theorem," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 180-182, February.
  13. J. D. Pitchpord, 1960. "GROWTH and THE ELASTICITY OF FACTOR SUBSTITUTION-super-1," The Economic Record, The Economic Society of Australia, vol. 36(76), pages 491-504, December.
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Cited by:
  1. Małgorzata Gawrycka & Aneta Sobiechowska-Ziegert & Anna Szymczak, 2012. "The Impact of Technological and Structural Changes in the National Economy on the Labour-Capital Relations," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(1), March.
  2. Axel Dreher & Pierre-Guillaume Méon & Friedrich Schneider, 2007. "The devil is in the shadow : Do institutions affect income and productivity or only official income and official productivity?," KOF Working papers 07-179, KOF Swiss Economic Institute, ETH Zurich.
  3. Alberto Bucci & Chiara Del Bo, 2009. "On the interaction between public investment and private capital in economic growth," UNIMI - Research Papers in Economics, Business, and Statistics unimi-1092, Universitá degli Studi di Milano.
  4. Alberto Bucci & Chiara Del Bo, 2012. "On the interaction between public and private capital in economic growth," Journal of Economics, Springer, vol. 106(2), pages 133-152, June.
  5. Temple, Jonathan, 2012. "The calibration of CES production functions," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 294-303.
  6. Shekhar Aiyar & Romain A Duval & Damien Puy & Yiqun Wu & Longmei Zhang, 2013. "Growth Slowdowns and the Middle-Income Trap," IMF Working Papers 13/71, International Monetary Fund.
  7. T.V.S.Ramamohan Rao, 2011. "Contemporary Relevance and Ongoing Controversies Related to the CES Production Function," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(2), pages 36-57, July.
  8. Dalgaard, Carl-Johan & Jensen, Martin Kaae, 2009. "Life-cycle savings, bequest, and a diminishing impact of scale on growth," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1639-1647, September.

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