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The Elasticities of Complementarity and Substitution

Author

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  • Peter Broer

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

This paper argues that the conventional definition of the elasticity of complementarity is not well suited to deal with the case of increasing returns. It proposes a slightly different formula, that uses a distance function formulation instead of a production function. The proposed definition coincides with the Hicksian measure in case the production function displays constant returns. It is more informative in case returns to scale are not constant, as it disentangles entry effects and substitution effects of factor supplies. The new definition is also preferable in that it is fully symmetric with the definition of the elasticity of substitution.

Suggested Citation

  • Peter Broer, 2004. "The Elasticities of Complementarity and Substitution," Tinbergen Institute Discussion Papers 04-101/1, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20040101
    as

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    File URL: https://papers.tinbergen.nl/04101.pdf
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    References listed on IDEAS

    as
    1. Angus Deaton, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 391-405.
    2. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Bas Jacobs & A. Lans Bovenberg, 2011. "Optimal Taxation of Human Capital and the Earnings Function," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(6), pages 957-971, December.
    2. David Stern, 2011. "Elasticities of substitution and complementarity," Journal of Productivity Analysis, Springer, vol. 36(1), pages 79-89, August.

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    More about this item

    Keywords

    distance function; elasticity of complementarity; returns to scale; tangency condition;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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