An Assessment of CES and Cobb-Douglas Production Functions: Working Paper 2008-05
This paper surveys the empirical and theoretical literature on macroeconomic production functions and assesses whether the constant elasticity of substitution (CES) or the Cobb-Douglas specification is more appropriate for use in the CBO’s macroeconomic forecasts. The Cobb-Douglas’s major strengths are its ease of use and its seemingly good empirical fit across many data sets. Unfortunately, the Cobb-Douglas still fits the data well in cases where some of its fundamental assumptions are violated. This suggests that many empirical tests of the Cobb-Douglas are picking up a statistical artifact
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- Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
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