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Productivity versus elasticity: a normalized constant elasticity of substitution production function applied to historical Soviet data

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  • Yasushi Nakamura

Abstract

This study tests the extensive growth hypothesis, which would attribute the Soviet economic slowdown to low elasticity of substitution and over-investment rather than deteriorating productivity growth. To circumvent the low availability of data, widely applicable new methods for estimating productivity and elasticity of substitution were developed based on the normalized constant elasticity of substitution (CES) production function. One is an extended version of the Solow residual calculation, and the other is a direct estimation of the time-varying parameter normalized CES production function. The application of the methods to the Soviet data showed a decreasing trend in productivity growth and a low elasticity of substitution of approximately 0.25. The results neither reject nor support the extensive growth hypothesis because of uncertainty in the interpretation of the low elasticity of substitution. The results suggest that it is reasonable to assert that both deteriorating productivity growth and low elasticity of substitution caused the Soviet economic slowdown. Further empirical studies on productivity and elasticity of substitution in the Soviet and other economies are necessary to fully understand relations between productivity growth, elasticity of substitution and economic development.

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  • Yasushi Nakamura, 2015. "Productivity versus elasticity: a normalized constant elasticity of substitution production function applied to historical Soviet data," Applied Economics, Taylor & Francis Journals, vol. 47(53), pages 5805-5823, November.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:53:p:5805-5823
    DOI: 10.1080/00036846.2015.1058909
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    Cited by:

    1. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    2. Kukic, Leonard, 2021. "Technical change and the postwar slowdown in Soviet economic growth," IFCS - Working Papers in Economic History.WH 33259, Universidad Carlos III de Madrid. Instituto Figuerola.
    3. Leonard Kukić, 2021. "The Nature Of Technological Failure: Patterns Of Biased Technical Change In Socialist Europe," Journal of Economic Surveys, Wiley Blackwell, vol. 35(3), pages 895-925, July.
    4. Cheng, Maolin & Han, Yun, 2020. "Application of a modified CES production function model based on improved PSO algorithm," Applied Mathematics and Computation, Elsevier, vol. 387(C).
    5. Chen, Hong & Wang, Xi & Singh, Baljeet, 2021. "Transient and persistent inefficiency traps in Chinese provinces," Economic Modelling, Elsevier, vol. 97(C), pages 335-347.
    6. Cheng Maolin & Shi Guojun & Han Yun, 2019. "A Modified CES Production Function Model and Its Application in Calculating the Contribution Rate of Energy and Other Influencing Factors to Economic Growth," Journal of Systems Science and Information, De Gruyter, vol. 7(2), pages 161-172, April.
    7. Maolin Cheng, 2019. "A Grey CES Production Function Model and Its Application in Calculating the Contribution Rate of Economic Growth Factors," Complexity, Hindawi, vol. 2019, pages 1-8, April.

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