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Think Again: Higher Elasticity of Substitution Increases Economic Resilience

Author

Listed:
  • P. Dumas

    (Centre International de Recherche sur l’Environnement et le Développement (CIRED))

  • S. Hallegatte

    (Ecole Nationale de la Météorologie, Météo-France and CIRED)

Abstract

This paper shows that, counter-intuitively, a higher elasticity of substitution in model production function can lead to reduced economic resilience and larger vulnerability to shocks in production factor prices. This result is due to the fact that assuming a higher elasticity of substitution requires a recalibration of the production function parameters to keep the model initial state unchanged. This result has consequences for economic analysis, e.g., on the economic vulnerability to climate change.

Suggested Citation

  • P. Dumas & S. Hallegatte, 2009. "Think Again: Higher Elasticity of Substitution Increases Economic Resilience," Working Papers 2009.66, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2009.66
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    References listed on IDEAS

    as
    1. Adam Rose & Gbadebo Oladosu & Shu‐Yi Liao, 2007. "Business Interruption Impacts of a Terrorist Attack on the Electric Power System of Los Angeles: Customer Resilience to a Total Blackout," Risk Analysis, John Wiley & Sons, vol. 27(3), pages 513-531, June.
    2. Magnus, Jan R, 1979. "Substitution between Energy and Non-Energy Inputs in the Netherlands, 1950-1976," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 465-484, June.
    3. Manuel Frondel & Christoph M. Schmidt, 2002. "The Capital-Energy Controversy: An Artifact of Cost Shares?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 53-79.
    4. Klump, Rainer & Saam, Marianne, 2008. "Calibration of normalised CES production functions in dynamic models," Economics Letters, Elsevier, vol. 99(2), pages 256-259, May.
    5. Kemfert, Claudia & Welsch, Heinz, 2000. "Energy-Capital-Labor Substitution and the Economic Effects of CO2 Abatement: Evidence for Germany," Journal of Policy Modeling, Elsevier, vol. 22(6), pages 641-660, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Substitution; Calibration; Constant Elasticity of Substitution; Shock;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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