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An Estimation of U.S. Industry-Level Capital-Labor Substitution

  • Edward J. Balistreri


  • Christine A. McDaniel


  • Eina Vivian Wong

    (University of Colorado)

A key parameter that determines the distributional impacts of a policy shift in general equilibrium models is the elasticity of substitution between capital and labor. Despite the importance of this parameter in applied modeling, its identification continues to pose a challenge. Given the structure of most growth models, we posit that the true relationship between capital and labor is likely to be close to Cobb- Douglas. Using a rich new data set from the Bureau of Economic Analysis, we estimate substitution elasticities for 28 industries, which cover the entire economy, and provide an indication of the long- and short-run estimates. We fail to reject the Cobb-Douglas specification in 20 of the 28 industries. These findings lend support to the Cobb-Douglas specification as a transparent starting point in simulation analysis.

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Paper provided by EconWPA in its series Computational Economics with number 0303001.

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Length: 26 pages
Date of creation: 27 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpco:0303001
Note: Type of Document - PDF; pages: 26; figures: Included
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  1. McKitrick, Ross R., 1998. "The econometric critique of computable general equilibrium modeling: the role of functional forms," Economic Modelling, Elsevier, vol. 15(4), pages 543-573, October.
  2. Harrison, Glenn W. & Jones, Richard & Kimbell, Larry J. & Wigle, Randal, 1993. "How robust is applied general equilibrium analysis?," Journal of Policy Modeling, Elsevier, vol. 15(1), pages 99-115, February.
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  6. Edward E. Leamer, 1982. "Let's Take the Con Out of Econometrics," UCLA Economics Working Papers 239, UCLA Department of Economics.
  7. Perroni, C. & Rutherford, T.F., 1995. "A Comparison of the Performance of Flexible Functional Forms for Use in Applied General Equilibrium Analysis," The Warwick Economics Research Paper Series (TWERPS) 441, University of Warwick, Department of Economics.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  9. Jorgenson, D.W. & Slesnick, D. & Wilcoxen, P.J., 1992. "Carbon Taxes and Economic Welfare," Harvard Institute of Economic Research Working Papers 1589, Harvard - Institute of Economic Research.
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