[sigma]: The long and short of it
Research on the elasticity of substitution between capital and labor - [sigma] - has been proceeding for 75 years. While there is clearly a strong case for the importance of [sigma] in the analysis of growth and other economic issues, much less agreement exists on the value of [sigma]. This paper offers some perspectives on prior estimates of [sigma], emphasizing the fundamental tension between the short-run data that are available and the long-run parameter that is required. Estimates of [sigma] based on various short-run and long-run models are discussed and, while the estimates range widely, the weight of the evidence suggests a value of [sigma] in the range of 0.40-0.60. There is little evidence to sustain the assumption of a Cobb-Douglas production function.
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