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Identifying the elasticity of substitution with biased technical change

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  • McAdam, Peter
  • Willman, Alpo
  • León-Ledesma, Miguel A.

Abstract

Despite being critical parameters in many economic fields, the received wisdom, in theoretical and empirical literatures, states that joint identification of the elasticity of capital-labor substitution and technical bias is infeasible. This paper challenges that pessimistic interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that the jointly modeling the production function and first-order conditions is superior to single-equation approaches in terms of robustly capturing production and technical parameters, especially when merged with "normalization". Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and the variability underlying past empirical studies. JEL Classification: C22, E23, O30, O51

Suggested Citation

  • McAdam, Peter & Willman, Alpo & León-Ledesma, Miguel A., 2009. "Identifying the elasticity of substitution with biased technical change," Working Paper Series 1001, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20091001
    Note: 50336
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    References listed on IDEAS

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    More about this item

    Keywords

    Constant Elasticity of Substitution; factor-augmenting technical change; Factor Income share; identification; Monte Carlo.; normalization;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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