The elasticity of derived demand, factor substitution, and product demand: Corrections to Hicks' formula and Marshall's Four Rules
The concept of the elasticity of substitution between capital and labor, introduced by John Hicks and Joan Robinson over 75Â years ago, has had important implications in labor economics and several areas of economic inquiry. In his The Theory of Wages (1932/1963), Hicks developed a formula that has proven very useful in relating the substitution elasticity to the derived demand for productive factors, the distribution of factor incomes, and Marshall's Four Rules. This short paper shows that the original and subsequent derivations of Hicks' celebrated formula contained a slip (that factor shares are independent of the substitution elasticity and therefore constant), presents a new derivation and a corrected formula, and demonstrates that, with the corrected formula, Marshall's First Rule based on the substitution elasticity is no longer generally valid.
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- Pierre Cahuc & Stéphane Carcillo & André Zylberberg, 2014.
Sciences Po publications
info:hdl:2441/1oclgdahv98, Sciences Po.
- Pierre Cahuc & Stéphane Carcillo & André Zylberberg, 2014. "Labor Economics," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01076752, HAL.
- Daron Acemoglu, 2003.
"Labor- And Capital-Augmenting Technical Change,"
Journal of the European Economic Association,
MIT Press, vol. 1(1), pages 1-37, 03.
- Mario García Molina, 2005. "Capital theory and the origins of the elasticity of substitution (1932--35)," Cambridge Journal of Economics, Oxford University Press, vol. 29(3), pages 423-437, May.
- M. Bronfenbrenner, 1961. "Notes On The Elasticity Of Derived Demand," Oxford Economic Papers, Oxford University Press, vol. 13(3), pages 254-261.
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