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Aggregation of Capital and Its Substitution with Energy


  • Gasper A. Garofalo
  • Devinder M. Malhotra


Controversy continues over the question of whether capital and energy are substitutes or complements. The authors find that the answer to the question partly depends on the aggregation of building capital and machinery capital into an aggregate input called capital. The authors' empirical results reject this aggregation. When building and machinery capital are treated as separate inputs, they find that machinery capital and energy are substitutes, while building capital and energy are complements. For policy purposes, this result implies that a rise in the price of energy will reduce building capital formation, while it will increase machinery capital formation.

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  • Gasper A. Garofalo & Devinder M. Malhotra, 1988. "Aggregation of Capital and Its Substitution with Energy," Eastern Economic Journal, Eastern Economic Association, vol. 14(3), pages 251-262, Jul-Sep.
  • Handle: RePEc:eej:eeconj:v:14:y:1988:i:3:p:251-262

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    References listed on IDEAS

    1. Binswanger, Hans P, 1974. "The Measurement of Technical Change Biases with Many Factors of Production," American Economic Review, American Economic Association, vol. 64(6), pages 964-976, December.
    2. Robert M. Solow, 1955. "The Production function and the Theory of Capital," Review of Economic Studies, Oxford University Press, vol. 23(2), pages 101-108.
    3. Joan Robinson, 1953. "The Production Function and the Theory of Capital," Review of Economic Studies, Oxford University Press, vol. 21(2), pages 81-106.
    4. Murray Brown, 1980. "The Measurement of Capital Aggregates: A Postreswitching Problem," NBER Chapters,in: The Measurement of Capital, pages 377-432 National Bureau of Economic Research, Inc.
    5. Paul A. Samuelson, 1962. "Parable and Realism in Capital Theory: The Surrogate Production Function," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 193-206.
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    Cited by:

    1. Anil Markandya & Suzette Pedroso-Galinato, 2007. "How substitutable is natural capital?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 37(1), pages 297-312, May.
    2. Elena Lagomarsino & Karen Turner, 2017. "Is the production function Translog or CES? An empirical illustration using UK data," Working Papers 1713, University of Strathclyde Business School, Department of Economics.
    3. Koetse, Mark J. & de Groot, Henri L.F. & Florax, Raymond J.G.M., 2008. "Capital-energy substitution and shifts in factor demand: A meta-analysis," Energy Economics, Elsevier, vol. 30(5), pages 2236-2251, September.
    4. Kim, Jihyo & Heo, Eunnyeong, 2013. "Asymmetric substitutability between energy and capital: Evidence from the manufacturing sectors in 10 OECD countries," Energy Economics, Elsevier, vol. 40(C), pages 81-89.

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