IDEAS home Printed from https://ideas.repec.org/p/fau/wpaper/wp2019_26.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/6125/lang/cs
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. T.D. Stanley & Hristos Doucouliagos, 2010. "Picture This: A Simple Graph That Reveals Much Ado About Research," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 170-191, February.
    2. Erceg, Christopher J. & Guerrieri, Luca & Gust, Christopher, 2008. "Trade adjustment and the composition of trade," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2622-2650, August.
    3. Orley Ashenfelter & Michael Greenstone, 2004. "Estimating the Value of a Statistical Life: The Importance of Omitted Variables and Publication Bias," American Economic Review, American Economic Association, vol. 94(2), pages 454-460, May.
    4. Furukawa, Chishio, 2019. "Publication Bias under Aggregation Frictions: Theory, Evidence, and a New Correction Method," EconStor Preprints 194798, ZBW - Leibniz Information Centre for Economics.
    5. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series 2234, CESifo.
    6. Cantore, Cristiano & Ferroni, Filippo & León-Ledesma, Miguel A., 2017. "The dynamics of hours worked and technology," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 67-82.
    7. C. E. Ferguson, 1965. "Time-Series Production Functions and Technological Progress in American Manufacturing Industry," Journal of Political Economy, University of Chicago Press, vol. 73(2), pages 135-135.
    8. Stanley, T. D. & Jarrell, Stephen B. & Doucouliagos, Hristos, 2010. "Could It Be Better to Discard 90% of the Data? A Statistical Paradox," The American Statistician, American Statistical Association, vol. 64(1), pages 70-77.
    9. Duffy, John & Papageorgiou, Chris, 2000. "A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March.
    10. Cameron, A. Colin & Gelbach, Jonah B. & Miller, Douglas L., 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(2), pages 238-249.
    11. Behrman, Jere R, 1972. "Sectoral Elasticities of Substitution between Capital and Labor in a Developing Economy: Time Series Analysis in the Case of Postwar Chile," Econometrica, Econometric Society, vol. 40(2), pages 311-326, March.
    12. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta‐Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, February.
    13. Young, Andrew T., 2013. "U.S. Elasticities Of Substitution And Factor Augmentation At The Industry Level," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 861-897, June.
    14. De Long, J Bradford & Lang, Kevin, 1992. "Are All Economic Hypotheses False?," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1257-1272, December.
    15. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K.Manufacturing," NBER Working Papers 0851, National Bureau of Economic Research, Inc.
    16. Shahram M. Amini & Christopher F. Parmeter, 2012. "Comparison Of Model Averaging Techniques: Assessing Growth Determinants," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(5), pages 870-876, August.
    17. 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.
    18. Robert S. Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2011. "A New Approach to Estimating Production Function Parameters: The Elusive Capital--Labor Substitution Elasticity," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(4), pages 587-594, October.
    19. Michael Knoblach & Martin Roessler & Patrick Zwerschke, 2020. "The Elasticity of Substitution Between Capital and Labour in the US Economy: A Meta‐Regression Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(1), pages 62-82, February.
    20. Orley Ashenfelter & Michael Greenstone, 2004. "Estimating the Value of a Statistical Life: The Importance of Omitted Variables and Publication Bias," American Economic Review, American Economic Association, vol. 94(2), pages 454-460, May.
    21. Antràs Pol, 2004. "Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-36, April.
    22. Miguel A. León-Ledesma & Peter McAdam & Alpo Willman, 2010. "Identifying the Elasticity of Substitution with Biased Technical Change," American Economic Review, American Economic Association, vol. 100(4), pages 1330-1357, September.
    23. Chirinko, Robert S., 2002. "Corporate Taxation, Capital Formation,and the Substitution Elasticity Between Labor and Capital," National Tax Journal, National Tax Association;National Tax Journal, vol. 55(2), pages 339-355, June.
    24. Michael Bruno & Jeffrey Sachs, 1982. "Input Price Shocks and the Slowdown in Economic Growth: The Case of U.K. Manufacturing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(5), pages 679-705.
    25. James Smith, 2008. "That elusive elasticity and the ubiquitous bias: is panel data a panacea?," Bank of England working papers 342, Bank of England.
    26. Cantore, Cristiano & Levine, Paul & Pearlman, Joseph & Yang, Bo, 2015. "CES technology and business cycle fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 61(C), pages 133-151.
    27. van der Werf, Edwin, 2008. "Production functions for climate policy modeling: An empirical analysis," Energy Economics, Elsevier, vol. 30(6), pages 2964-2979, November.
    28. Knoblach, Michael & Rößler, Martin & Zwerschke, Patrick, 2016. "The Elasticity of Factor Substitution Between Capital and Labor in the U.S. Economy: A Meta-Regression Analysis," CEPIE Working Papers 03/16, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    29. Deirdre Nansen McCloskey & Stephen T. Ziliak, 2019. "What quantitative methods should we teach to graduate students? A comment on Swann’s “Is precise econometrics an illusion?”," The Journal of Economic Education, Taylor & Francis Journals, vol. 50(4), pages 356-361, October.
    30. Cummins, Jason G. & Hassett, Kevin A., 1992. "The Effects of Taxation on Investment: New Evidence from Firm Level Panel Data," National Tax Journal, National Tax Association, vol. 45(3), pages 243-51, September.
    31. Smith, James, 2008. "That elusive elasticity and the ubiquitous bias: Is panel data a panacea?," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 760-779, June.
    32. Turnovsky, Stephen J., 2002. "Intertemporal and intratemporal substitution, and the speed of convergence in the neoclassical growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 26(9-10), pages 1765-1785, August.
    33. Orley Ashenfelter & Michael Greenstone, 2004. "Estimating the Value of a Statistical Life: The Importance of Omitted Variables and Publication Bias," Working Papers 858, Princeton University, Department of Economics, Industrial Relations Section..
    34. Humphrey, David Burras & Moroney, John R, 1975. "Substitution among Capital, Labor, and Natural Resource Products in American Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 57-82, February.
    35. Bruce E. Hansen, 2007. "Least Squares Model Averaging," Econometrica, Econometric Society, vol. 75(4), pages 1175-1189, July.
    36. Chris Doucouliagos & T.D. Stanley, 2013. "Are All Economic Facts Greatly Exaggerated? Theory Competition And Selectivity," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 316-339, April.
    37. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 2011. "A New Approach to Estimating Production Function Parameters: The Elusive Capital–Labor Substitution Elasticity," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(4), pages 587-594.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tyler Atkinson & Michael Plante & Alexander Richter & Nathaniel Throckmorton, 2022. "Complementarity and Macroeconomic Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 44, pages 225-243, April.
    2. Zhuanlan Sun & Demi Zhu, 2023. "Investigating environmental regulation effects on technological innovation: A meta-regression analysis," Energy & Environment, , vol. 34(3), pages 463-492, May.
    3. Bom, Pedro R.D. & Erauskin, Iñaki, 2022. "Productive government investment and the labor share," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 347-363.
    4. Jan Behringer, 2019. "Factor shares and the rise in corporate net lending," IMK Working Paper 202-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    5. Tomohiro HIRANO & Joseph E. Stiglitz, 2021. "The Wobbly Economy; Global Dynamics with Phase Transitions and State Transitions," CIGS Working Paper Series 21-008E, The Canon Institute for Global Studies.
    6. Kvarven, Amanda & Strømland, Eirik & Johannesson, Magnus, 2019. "Identification of and Correction for Publication Bias: Comment," MetaArXiv dh87m, Center for Open Science.
    7. Tomáš Havránek & T. D. Stanley & Hristos Doucouliagos & Pedro Bom & Jerome Geyer‐Klingeberg & Ichiro Iwasaki & W. Robert Reed & Katja Rost & R. C. M. van Aert, 2020. "Reporting Guidelines For Meta‐Analysis In Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 469-475, July.
    8. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    9. Khafagy, Amr & Vigani, Mauro, 2022. "Technical change and the Common Agricultural Policy," Food Policy, Elsevier, vol. 109(C).
    10. Petr Polak & Nikol Polakova & Anna Tlusta, 2020. "How Bad Are Trade Wars? Evidence from Tariffs," Working Papers 2020/15, Czech National Bank.
    11. Cristina Procházková Ilinitchi & Anastasie Pustovalová & David Procházka, 2021. "Elasticity of Substitution in the Manufacturing Sector in the Czech Republic," Politická ekonomie, Prague University of Economics and Business, vol. 2021(4), pages 435-456.
    12. Shakeel, Muhammad, 2021. "Analyses of energy-GDP-export nexus: The way-forward," Energy, Elsevier, vol. 216(C).
    13. Klona, Maria, 2021. "The Days After COVID-19: A Meta-Analysis on the Impact of Epidemics and Pandemics on Long-Term Macro-Economic Performance," American Business Review, Pompea College of Business, University of New Haven, vol. 24(1), pages 188-224, May.
    14. Jan Behringer, 2019. "Factor shares and the rise in corporate net lending," IMK Working Paper 202-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. Mustafa akan, 2017. "Optimal Capital and Labor Investment in Price Regulated State Economic Service Enterprises," Proceedings of International Academic Conferences 5908306, International Institute of Social and Economic Sciences.
    16. Dominika Ehrenbergerova & Josef Bajzik, 2020. "The Effect of Monetary Policy on House Prices - How Strong is the Transmission?," Working Papers 2020/14, Czech National Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gechert, Sebastian & Havranek, Tomas & Irsova, Zuzana & Kolcunova, Dominika, 2019. "Death to the Cobb-Douglas Production Function? A Quantitative Survey of the Capital-Labor Substitution Elasticity," EconStor Preprints 203136, ZBW - Leibniz Information Centre for Economics.
    2. Havranek, Tomas & Irsova, Zuzana & Gechert, Sebastian & Kolcunova, Dominika, 2019. "Death to the Cobb-Douglas Production Function? A Meta-Analysis of the Capital-Labor Substitution Elasticity," MetaArXiv 6um5g, Center for Open Science.
    3. Sebastian Gechert & Tomas Havranek & Zuzana Irsova & Dominika Kolcunova, 2022. "Measuring Capital-Labor Substitution: The Importance of Method Choices and Publication Bias," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 45, pages 55-82, July.
    4. Michael Knoblach & Fabian Stöckl, 2020. "What Determines The Elasticity Of Substitution Between Capital And Labor? A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 847-875, September.
    5. Knoblach, Michael & Rößler, Martin & Zwerschke, Patrick, 2016. "The Elasticity of Factor Substitution Between Capital and Labor in the U.S. Economy: A Meta-Regression Analysis," CEPIE Working Papers 03/16, Technische Universität Dresden, Center of Public and International Economics (CEPIE).
    6. Dominika Ehrenbergerova & Josef Bajzik & Tomas Havranek, 2023. "When Does Monetary Policy Sway House Prices? A Meta-Analysis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(2), pages 538-573, June.
    7. Tomas Havranek & Anna Sokolova, 2020. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 144 Studies Say 'Probably Not'," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 97-122, January.
    8. Roman Horvath & Ali Elminejad & Tomas Havranek, 2020. "Publication and Identification Biases in Measuring the Intertemporal Substitution of Labor Supply," Working Papers IES 2020/32, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2020.
    9. Jindrich Matousek & Tomas Havranek & Zuzana Irsova, 2022. "Individual discount rates: a meta-analysis of experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 25(1), pages 318-358, February.
    10. Rainer Klump & Peter McAdam & Alpo Willman, 2012. "The Normalized Ces Production Function: Theory And Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 769-799, December.
    11. Zigraiova, Diana & Havranek, Tomas & Irsova, Zuzana & Novak, Jiri, 2021. "How puzzling is the forward premium puzzle? A meta-analysis," European Economic Review, Elsevier, vol. 134(C).
    12. Chirinko, Robert S., 2008. "[sigma]: The long and short of it," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 671-686, June.
    13. Akaev, Askar & Devezas, Tessaleno & Ichkitidze, Yuri & Sarygulov, Askar, 2021. "Forecasting the labor intensity and labor income share for G7 countries in the digital age," Technological Forecasting and Social Change, Elsevier, vol. 167(C).
    14. Tomas Havranek, 2013. "Publication Bias in Measuring Intertemporal Substitution," Working Papers IES 2013/15, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2013.
    15. Tomas Havranek & Zuzana Irsova & Lubica Laslopova & Olesia Zeynalova, 2020. "Skilled and Unskilled Labor Are Less Substitutable than Commonly Thought," Working Papers IES 2020/29, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2020.
    16. Hippolyte W. Balima & Eric G. Kilama & Rene Tapsoba, 2017. "Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis," IMF Working Papers 2017/213, International Monetary Fund.
    17. Dominika Ehrenbergerova & Josef Bajzik, 2020. "The Effect of Monetary Policy on House Prices - How Strong is the Transmission?," Working Papers 2020/14, Czech National Bank.
    18. Dawson, John W. & Sturgill, Brad, 2022. "Market Institutions and Factor Shares Across Countries," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 266-289.
    19. Gómez, Manuel A., 2008. "Dynamics Of The Saving Rate In The Neoclassical Growth Model With Ces Production," Macroeconomic Dynamics, Cambridge University Press, vol. 12(2), pages 195-210, April.
    20. Michael Knoblach & Martin Roessler & Patrick Zwerschke, 2020. "The Elasticity of Substitution Between Capital and Labour in the US Economy: A Meta‐Regression Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(1), pages 62-82, February.

    More about this item

    Keywords

    Elasticity of substitution; capital; labor; publication model uncertainty bias;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2019_26. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Natalie Svarcova (email available below). General contact details of provider: https://edirc.repec.org/data/icunicz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.