A microfoundation for normalized CES production functions with factor-augmenting technical change
AbstractWe derive the aggregate normalized CES production function from idea-based microfoundations where firms are allowed to choose their capital- and labor-augmenting technology optimally from a menu of available technologies. This menu is in turn augmented through factor-specific R&D. The considered model yields a number of interesting results. First, normalization of the production function can be maintained simultaneously at the local and at the aggregate level, greatly facilitating interpretation of the aggregate production function’s parameters in terms of the underlying idea distributions. Second, in line with earlier findings, if capital- and labor-augmenting ideas are independently Weibull-distributed then the aggregate production function is CES; if they are independently Pareto-distributed, then it is Cobb–Douglas. Third, by disentangling technology choice by firms from R&D output, one can draw a clearcut distinction between the direction of R&D and the direction of technical change actually observed in the economy, which are distinct concepts. Fourth, it is argued that the Weibull distribution should be a good approximation of the true unit factor productivity distribution (and thus the CES should be a good approximation of the true aggregate production function) if a “technology” is in fact an assembly of a large number of complementary components. This argument is illustrated with a novel, tractable model of directed (factor-specific) R&D. Finally, it is shown that all our results carry forward to the general case of n-input production functions.
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Bibliographic InfoPaper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 98.
Date of creation: 2011
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More information through EDIRC
CES production function; normalization; Weibull distribution; direction of technical change; directed R&D; optimal technology choice;
Other versions of this item:
- Growiec, Jakub, 2013. "A microfoundation for normalized CES production functions with factor-augmenting technical change," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2336-2350.
- Jakub Growiec, 2011. "A Microfoundation for Normalized CES Production Functions with Factor-Augmenting Technical Change," DEGIT Conference Papers c016_013, DEGIT, Dynamics, Economic Growth, and International Trade.
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
- E25 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-EFF-2011-11-07 (Efficiency & Productivity)
- NEP-INO-2011-11-07 (Innovation)
- NEP-MAC-2011-11-07 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rainer Klump & Peter McAdam & Alpo Willman, 2012.
"The Normalized Ces Production Function: Theory And Empirics,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 26(5), pages 769-799, December.
- Klump, Rainer & McAdam, Peter & Willman, Alpo, 2011. "The normalized CES production function: theory and empirics," Working Paper Series 1294, European Central Bank.
- Growiec, Jakub, 2006.
"A New Class of Production Functions and an Argument Against Purely Labor-Augmenting Technical Change,"
7069, University Library of Munich, Germany.
- Jakub Growiec, 2008. "A new class of production functions and an argument against purely labor-augmenting technical change," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(4), pages 483-502.
- GROWIEC, Jakub, 2006. "A new class of production functions and an argument against purely labor-augmenting technical change," CORE Discussion Papers 2006056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Growiec, Jakub, 2008. "Production functions and distributions of unit factor productivities: Uncovering the link," Economics Letters, Elsevier, vol. 101(1), pages 87-90, October.
- Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
- Jakub Growiec, 2007.
"Beyond the Linearity Critique: The Knife-edge Assumption of Steady-state Growth,"
Springer, vol. 31(3), pages 489-499, June.
- Jakub Growiec, 2005. "Beyond the Linearity Critique: The Knife-Edge Assumption of Steady State Growth," GE, Growth, Math methods 0505003, EconWPA, revised 23 Jun 2005.
- Klump, Rainer & McAdam, Peter & Willman, Alpo, 2011.
"The normalized CES production function: theory and empirics,"
Working Paper Series
1294, European Central Bank.
- Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
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