Non-linear technological progress and the substitutability of energy for capital: an application using the translog cost function
This paper analyses the production process of four industries over four separate time periods using datasets taken form Berndt and Wood (1975, 1979), Hunt (1984a, 1986), Norsworthy and Harper (1981) and Jorgensen and Stiroh (2000). In their initial paper Berndt and Wood failed to explore the alternative options available to them to represent technological progress, a deficiency noted by Hunt (1986) who tested for alternative representations of technology (inter alia) using the Berndt and Wood data. This paper extends this line of reasoning/research by allowing technological progress to take more flexible non-linear forms using both deterministic and stochastic trend models. The results reveal that ‘non-linear trend’ models are generally preferred to ‘linear trend’ or ‘no trend’ models hence raising a question over the validity of assumptions used in much previous empirical research. Further the results reveal that the different assumptions lead to different results for the energy-capital elasticity of substitution.
|Date of creation:||Jun 2008|
|Date of revision:|
|Publication status:||Published in Economics Bulletin 30(1) 2010, pp. 84-93. (Revised Version)|
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- Turnovsky, Michelle & Folie, Michael & Ulph, Alistair, 1982. "Factor Substitutability in Australian Manufacturing with Emphasis on Energy Inputs," The Economic Record, The Economic Society of Australia, vol. 58(160), pages 61-72, March.
- Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-68, August.
- Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
- 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.
- Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-54, June.
- Thompson, Henry, 2006. "The applied theory of energy substitution in production," Energy Economics, Elsevier, vol. 28(4), pages 410-425, July.
- Blackorby, Charles & Russell, R Robert, 1981. "The Morishima Elasticity of Substitution; Symmetry, Constancy, Separability, and Its Relationship to the Hicks and Allen Elasticities," Review of Economic Studies, Wiley Blackwell, vol. 48(1), pages 147-58, January.
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