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Avoiding Mis-estimation of the CES Function: Unit Matters

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  • Haoqi Qian
  • Libo Wu

Abstract

We demonstrate that unit errors of measurement will lead to significant biases in estimating the constant elasticity of substitution (CES) function. Monte-Carlo simulations show that estimation results tend to reach Cobb–Douglas (CD) functions or extreme values if units of input variables are incorrectly used. To avoid this problem, we suggest adding an overall efficiency parameter and a unit correction parameter which is similar to biased technological change parameter when estimating CES functions. Any unit error of measurement can be captured by these two parameters while allowing researchers to get unbiased estimation results of other parameters.

Suggested Citation

  • Haoqi Qian & Libo Wu, 2020. "Avoiding Mis-estimation of the CES Function: Unit Matters," Applied Economics, Taylor & Francis Journals, vol. 52(19), pages 2056-2062, April.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:19:p:2056-2062
    DOI: 10.1080/00036846.2019.1682116
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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. Wu, Libo & Zhang, Shuaishuai & Qian, Haoqi, 2022. "Distributional effects of China's National Emissions Trading Scheme with an emphasis on sectoral coverage and revenue recycling," Energy Economics, Elsevier, vol. 105(C).
    3. Wu, Libo & Zhou, Ying & Qian, Haoqi, 2022. "Global actions under the Paris agreement: Tracing the carbon leakage flow and pursuing countermeasures," Energy Economics, Elsevier, vol. 106(C).

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