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

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  • Shekhar Aiyar

    (International Monetary Fund)

  • Carl-Johan Dalgaard

    (Department of Economics, University of Copenhagen)

Abstract

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.

Suggested Citation

  • Shekhar Aiyar & Carl-Johan Dalgaard, 2008. "Accounting for Productivity: Is it OK to Assume that the World is Cobb-Douglas?," Discussion Papers 08-14, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0814
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    11. Shekhar Aiyar & Carl-Johan Dalgaard, 2005. "Total Factor Productivity Revisited: A Dual Approach to Development Accounting," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 82-102, April.
    12. 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.
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    Cited by:

    1. Casper Worm Hansen, 2013. "Health and Development: A Neoclassical Perspective," Journal of Human Capital, University of Chicago Press, vol. 7(3), pages 274-295.
    2. Axel Dreher & Pierre-Guillaume Méon & Friedrich Schneider, 2014. "The devil is in the shadow: Do institutions affect income and productivity or only official income and official productivity?," Post-Print CEB, ULB -- Universite Libre de Bruxelles, vol. 158(1-2), pages 121-141, January.
    3. Shekhar Aiyar & Romain A Duval & Damien Puy & Yiqun Wu & Longmei Zhang, 2013. "Growth Slowdowns and the Middle-Income Trap," IMF Working Papers 13/71, International Monetary Fund.
    4. Serranito, Francisco, 2013. "Heterogeneous technology and the technological catching-up hypothesis: Theory and assessment in the case of MENA countries," Economic Modelling, Elsevier, vol. 30(C), pages 685-697.
    5. Shekhar Aiyar & Christian H Ebeke, 2016. "The Impact of Workforce Aging on European Productivity," IMF Working Papers 16/238, International Monetary Fund.
    6. Alberto BUCCI & Chiara DEL BO, 2009. "On the interaction between public investment and private capital in economic growth," Departmental Working Papers 2009-44, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    7. Alberto Bucci & Chiara Del Bo, 2012. "On the interaction between public and private capital in economic growth," Journal of Economics, Springer, vol. 106(2), pages 133-152, June.
    8. T.V.S.Ramamohan Rao, 2011. "Contemporary Relevance and Ongoing Controversies Related to the CES Production Function," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(2), pages 36-57, July.
    9. Norman Maynard, 2016. "Long-Run Growth Differences and the Neoclassical Growth Model," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(3), pages 574-583, September.
    10. Dalgaard, Carl-Johan & Jensen, Martin Kaae, 2009. "Life-cycle savings, bequest, and a diminishing impact of scale on growth," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1639-1647, September.
    11. Temple, Jonathan, 2012. "The calibration of CES production functions," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 294-303.
    12. Alberto Bucci, 2012. "Public Capital, Private Capital and Economic Growth," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 120(2), pages 149-180.
    13. Małgorzata Gawrycka & Aneta Sobiechowska-Ziegert & Anna Szymczak, 2012. "The Impact of Technological and Structural Changes in the National Economy on the Labour-Capital Relations," Contemporary Economics, University of Finance and Management in Warsaw, vol. 6(1), March.
    14. repec:fgv:epgrbe:v:71:y:2017:i:1:a:64336 is not listed on IDEAS
    15. repec:sbe:breart:v:37:y:2017:i:2:a:72552 is not listed on IDEAS

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