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That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity

  • Robert S. Chirinko
  • Steven M. Fazzari
  • Andrew P. Meyer

The elasticity of substitution between capital and labor features prominently in several areas of economic research. However, a consensus estimate remains elusive. We develop an estimation strategy that filters panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1240.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1240
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