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The elasticity of substitution: evidence from a UK firm-level data set

  • Barnes, Sebastian

    ()

    (OECD)

  • Price, Simon

    ()

    (Bank of England)

  • Sebastia Barriel, Maria

    ()

    (Bank of England)

Using a panel of UK firms spanning three decades, we provide estimates of the long-run elasticity of substitution between capital and other factors of production, the (negative of the) elasticity of capital and investment with respect to the user cost. The parameter is estimated using 'time averages' (with data differenced over long periods) and pooled mean group panel methods. The robust result is that the elasticity is in the region of 0.4. This is consistent with previous results obtained using aggregate UK data, and is also in line with some recent results using US firm-level data. Estimated returns to scale exceed unity. When constant returns are imposed, the estimated elasticity of substitution is not substantially changed.

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Paper provided by Bank of England in its series Bank of England working papers with number 348.

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Length: 51 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:boe:boeewp:0348
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  1. Mark L.J. Wright & Esteban Rossi-Hansberg, 2004. "Firm Size Dynamics in the Aggregate Economy," 2004 Meeting Papers 878, Society for Economic Dynamics.
  2. Vlieghe, Gertjan & Stephen Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed, 2003. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," Royal Economic Society Annual Conference 2003 212, Royal Economic Society.
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