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Accounting for Productivity: Is it OK to Assume that the World is Cobb-Douglas?

  • Shekhar Aiyar

    (International Monetary Fund)

  • Carl-Johan Dalgaard

    (Department of Economics, University of Copenhagen)

The development accounting literature almost always assumes a Cobb-Douglas (CD) production function. However, if in reality the elasticity of substitution between capital and labor deviates substantially from 1, the assumption is invalid, potentially casting doubt on the commonly held view that factors of production are relatively unimportant in accounting for differences in labor productivity. We use international data on relative factor shares and capital-output ratios to formulate a number of tests for the validity of the CD assumption. We find that the CD specification performs reasonably well for the purposes of cross-country productivity accounting.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 08-14.

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Length: 19 pages
Date of creation: Jun 2008
Date of revision:
Handle: RePEc:kud:kuiedp:0814
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  1. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," Economic Journal, Royal Economic Society, vol. 106(437), pages 1056-69, July.
  2. J. D. Pitchpord, 1960. "GROWTH and THE ELASTICITY OF FACTOR SUBSTITUTION-super-1," The Economic Record, The Economic Society of Australia, vol. 36(76), pages 491-504, December.
  3. Shekhar Aiyar & Carl-Johan Dalgaard, 2004. "Total Factor Productivity Revisited: A Dual Approach to Development Accounting," EPRU Working Paper Series 04-07, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  4. Lutz Hendricks, 2002. "How Important Is Human Capital for Development? Evidence from Immigrant Earnings," American Economic Review, American Economic Association, vol. 92(1), pages 198-219, March.
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  7. 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.
  8. Diego Restuccia, 2004. "Barriers to Capital Accumulation and Aggregate Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 225-238, 02.
  9. Carl-Johan Dalgaard & Martin Kaae Jensen, 2007. "Life Cycle Savings, Bequest, and the Diminishing Impact of Scale on Growth," Discussion Papers 07-17, University of Copenhagen. Department of Economics.
  10. John Duffy & Chris Papageorgiou & Fidel Perez-Sebastian, 2004. "Capital-Skill Complementarity? Evidence from a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 327-344, February.
  11. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  12. Charles I. Jones & Dean Scrimgeour, 2008. "A New Proof of Uzawa's Steady-State Growth Theorem," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 180-182, February.
  13. Diamond, Peter & McFadden, Daniel & Rodriguez, Miguel, 1978. "Measurement of the Elasticity of Factor Substitution and Bias of Technical Change," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 2, chapter 5 McMaster University Archive for the History of Economic Thought.
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