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Estimation of Substitution Elasticities in Three-Factor Production Functions: Identifying the Role of Energy

Author

Listed:
  • Frieling, Julius

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

  • Madlener, Reinhard

    (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))

Abstract

Existing estimation methods for multi-factor CES functions require limiting assumptions about the nature of technical change. We demonstrate how a system of equations and a fixed elasticity in the nested process can provide identification for more flexible specifications and for small data samples. We evaluate the role of energy inputs in an aggregate production function using data for Germany. The use of a Cobb-Douglas process for capital and labor by other studies biases elasticity estimates upwards. The estimated low elasticity means that energy availability is a potentially limiting factor for growth and that productivity gains for capital and labor are energy-using.

Suggested Citation

  • Frieling, Julius & Madlener, Reinhard, 2016. "Estimation of Substitution Elasticities in Three-Factor Production Functions: Identifying the Role of Energy," FCN Working Papers 1/2016, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Sep 2016.
    • Handle: RePEc:ris:fcnwpa:2016_001
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    Cited by:

    1. Hendrik Schmitz and Reinhard Madlener, 2020. "Direct and Indirect Energy Rebound Effects in German Households: A Linearized Almost Ideal Demand System Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5), pages 89-118.
    2. Michael A. Clemens & Satish Chand, 2023. "Labour Mobility With Vocational Skill: Australian Demand and Pacific Supply," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 56(4), pages 462-486, December.
    3. Frieling, Julius & Madlener, Reinhard, 2017. "Fueling the US Economy: Energy as a Production Factor from the Great Depression until Today," FCN Working Papers 2/2017, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    4. Frieling, Julius & Madlener, Reinhard, 2017. "The Turning Tide: How Energy has Driven the Transformation of the British Economy Since the Industrial Revolution," FCN Working Papers 7/2017, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    5. Höwer, Daniel & Oberst, Christian A. & Madlener, Reinhard, 2017. "Regionalization Heuristic to Map Spatial Heterogeneity of Macroeconomic Impacts: The Case of the Green Energy Transition in NRW," FCN Working Papers 13/2017, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised 01 Feb 2019.
    6. Agustin Velasquez, 2023. "Production Technology, Market Power, and the Decline of the Labor Share," IMF Working Papers 2023/032, International Monetary Fund.
    7. Colmenares, Gloria & Löschel, Andreas & Madlener, Reinhard, 2019. "The rebound effect and its representation in energy and climate models," CAWM Discussion Papers 106, University of Münster, Münster Center for Economic Policy (MEP).

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    More about this item

    Keywords

    technical change; multifactor production; energy demand; aggregate production;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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