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Think Again: Higher Elasticity of Substitution Increases Economic Resilience

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  • Dumas, Patrice
  • Hallegatte, Stephane

Abstract

This paper shows that, counter-intuitively, a higher elasticity of substitution in model production function can lead to reduced economic resilience and larger vulnerability to shocks in production factor prices. This result is due to the fact that assuming a higher elasticity of substitution requires a recalibration of the production function parameters to keep the model initial state unchanged. This result has consequences for economic analysis, e.g., on the economic vulnerability to climate change.

Suggested Citation

  • Dumas, Patrice & Hallegatte, Stephane, 2009. "Think Again: Higher Elasticity of Substitution Increases Economic Resilience," Sustainable Development Papers 54283, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemdp:54283
    DOI: 10.22004/ag.econ.54283
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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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