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Substitution elasticities between capital, labour, material, electricity and fossil fuels in German producing and service sectors

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  • Koschel, Henrike
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    Abstract

    In this paper, substitutional relationships between capital, labour, material, electricity, and fossil fuels in German producing and service sectors are estimated using a translog cost function. Estimates are based on a pooled time-series cross-sectional data sample for the period 1978-90 and nearly 50 sectors reported by the national account statistics. Results indicate that, except for the service sectors, own-price elasticities of all factor demands are below 0.5 (in absolute terms). In terms of the Morishima elasticity of substitution, labour and capital are substitutes in all sectors. Labour is generally a substitute for electricity, but not for fossil fuels. Results also support the hypothesis of capitalenergy substitutability and that the German economy is characterised by a nonhomothetic, non-constant-returns-to-scale production function. Substitution elasticities between input aggregates are estimated based on the nesting structure which underlies the computable general equilibrium model GEM-E3. Testing for weak homothetic separability restrictions, however, yields that input aggregation is allowed only in particular cases. Simulations with the GEM-E3 model demonstrate that the impacts of an ecological tax reform respond to a variation of substitution elasticities, but, all in all, the model proves to be relatively stable within a plausible range of values. --

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    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 00-31.

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    Date of creation: 2000
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    Handle: RePEc:zbw:zewdip:5314

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    1. Pindyck, Robert S, 1979. "Interfuel Substitution and the Industrial Demand for Energy: An International Comparison," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 169-79, May.
    2. Koebel, Bertrand M. & Falk, Martin, 1999. "Curvature conditions and substitution pattern among capital, energy, materials and heterogeneous labour," ZEW Discussion Papers 99-06, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Fuss, Melvyn A., 1977. "The demand for energy in Canadian manufacturing : An example of the estimation of production structures with many inputs," Journal of Econometrics, Elsevier, vol. 5(1), pages 89-116, January.
    4. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer, vol. 6(3), pages 421-443, August.
    5. Chung, Jae Wan, 1987. "On the Estimation of Factor Substitution in the Translog Model," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 409-17, August.
    6. Griffin, James M & Gregory, Paul R, 1976. "An Intercountry Translog Model of Energy Substitution Responses," American Economic Review, American Economic Association, vol. 66(5), pages 845-57, December.
    7. Denny, Michael & Fuss, Melvyn A, 1977. "The Use of Approximation Analysis to Test for Separability and the Existence of Consistent Aggregates," American Economic Review, American Economic Association, vol. 67(3), pages 404-18, June.
    8. Kintis, Andreas A. & Panas, Epaminondas E., 1989. "The capital--energy controversy: further results," Energy Economics, Elsevier, vol. 11(3), pages 201-212, July.
    9. Blackorby, Charles & Russell, R Robert, 1989. "Will the Real Elasticity of Substitution Please Stand Up? (A Comparison of the Allen/Uzawa and Morishima Elasticities)," American Economic Review, American Economic Association, vol. 79(4), pages 882-88, September.
    10. Julian R. Betts, 1997. "The Skill Bias Of Technological Change In Canadian Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 146-150, February.
    11. Diewert, Walter E & Wales, Terence J, 1987. "Flexible Functional Forms and Global Curvature Conditions," Econometrica, Econometric Society, vol. 55(1), pages 43-68, January.
    12. Stephen Casler, 1997. "Applied production theory: explicit, flexible, and general functional forms," Applied Economics, Taylor & Francis Journals, vol. 29(11), pages 1483-1492.
    13. Schmidt, Tobias F. N. & Koschel, Henrike, 1998. "Modelling of foreign trade in applied general equilibrium models: theoretical approaches and sensitivity analysis with the GEM-E3 model," ZEW Discussion Papers 98-08, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    14. Ruud de Mooij & A. Bovenberg, 1998. "Environmental Taxes, International Capital Mobility and Inefficient Tax Systems: Tax Burden vs. Tax Shifting," International Tax and Public Finance, Springer, vol. 5(1), pages 7-39, February.
    15. Kemfert, Claudia & Welsch, Heinz, 2000. "Energy-Capital-Labor Substitution and the Economic Effects of CO2 Abatement: Evidence for Germany," Journal of Policy Modeling, Elsevier, vol. 22(6), pages 641-660, November.
    16. Bovenberg, A.L. & Mooij, R.A. de, 1994. "Environmental taxes and labor-market distortions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-148753, Tilburg University.
    17. A. Bovenberg & Frederick Van der Ploeg, 1998. "Consequences of Environmental Tax Reform for Unemployment and Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 12(2), pages 137-150, September.
    18. Thompson, Peter & Taylor, Timothy G, 1995. "The Capital-Energy Substitutability Debate: A New Look," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 565-69, August.
    19. Conrad, Klaus & Unger, Ralph, 1987. "Ex post tests for short-and long-run optimization," Journal of Econometrics, Elsevier, vol. 36(3), pages 339-358, November.
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