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Death to the Cobb-Douglas Production Function

Author

Listed:
  • Sebastian Gechert

    () (Macroeconomic Policy Institute, Hans-Böckler-Straße 39 40476, Düsseldorf, Germany)

  • Tomas Havranek

    () (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)

  • Zuzana Irsova

    () (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)

  • Dominika Kolcunova

    () (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic
    Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)

Abstract

We show that the large elasticity of substitution between capital and labor estimated in the literature on average, 0.9, can be explained by three factors: publication bias, use of aggregated data, and omission of the first-order condition for capital. The mean elasticity conditional on the absence of publication bias, disaggregated data, and inclusion of informa- tion from the first-order condition for capital is 0.3. To obtain this result, we collect 3,186 estimates of the elasticity reported in 121 studies, codify 71 variables that reflect the context in which researchers produce their estimates, and address model uncertainty by Bayesian and frequentist model averaging. We employ nonlinear techniques to correct for publication bias, which is responsible for at least half of the overall reduction in the mean elasticity from 0.9 to 0.3. Our findings also suggest that a failure to normalize the production function leads to a substantial upward bias in the estimated elasticity. The weight of evidence accumulated in the empirical literature emphatically rejects the Cobb-Douglas specification.

Suggested Citation

  • Sebastian Gechert & Tomas Havranek & Zuzana Irsova & Dominika Kolcunova, 2019. "Death to the Cobb-Douglas Production Function," Working Papers IES 2019/26, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2019.
  • Handle: RePEc:fau:wpaper:wp2019_26
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    Keywords

    Elasticity of substitution; capital; labor; publication model uncertainty bias;

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