Elasticities of Substitution and Complementarity
This paper develops a classification scheme of the many different definitions of elasticities of substitution and complementarity in the production case based on duality, gross and net substitution, elasticity type, and four different basic concepts of substitution and complementarity is developed. The classic Berndt-Wood dataset is used to show how the various elasticities differ. This variation is considerable and shows that the correct elasticity should be used for the intended purpose – there is no one true elasticity of substitution. The paper also reintroduces and clarifies Pigou’s contributions to the debate on the elasticity of substitution after seventy years of obscurity in which they have not been cited.
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