Isoelastic Elasticity of Substitution Production Functions

43 Pages Posted: 25 Sep 2015

See all articles by Jakub Growiec

Jakub Growiec

National Bank of Poland; Warsaw School of Economics (SGH)

Jakub Muck

National Bank of Poland - Department of Economics; Warsaw School of Economics (SGH) - Institute of Econometrics

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2015

Abstract

We generalize the normalized Constant Elasticity of Substitution (CES) production function by allowing the elasticity of substitution to vary isoelastically with (i) relative factor shares, (ii) marginal rates of substitution, (iii) capital-labor ratios, or (iv) capital-output ratios. Ensuing four variants of Isoelastic Elasticity of Substitution (IEES) production functions have a range of intuitively desirable properties and yield empirically testable predictions for the functional relationship between relative factor shares and (raw or technology-adjusted) capital-labor ratios. As an empirical application, the parameters of IEES functions are estimated in a three-equation supply-side system with factor-augmenting technical change, based on data on aggregate production in the post-war US economy. Our estimates consistently imply that the elasticity of substitution between capital and labor has remained relatively stable, at about 0.8-0.9, from 1948 to the 1980s, followed by a period of secular decline.

Keywords: production function, factor share, elasticity of substitution, marginal rate of substitution, normalization

JEL Classification: E23, E25, O33, O47

Suggested Citation

Growiec, Jakub and Muck, Jakub, Isoelastic Elasticity of Substitution Production Functions (September 18, 2015). Available at SSRN: https://ssrn.com/abstract=2665051 or http://dx.doi.org/10.2139/ssrn.2665051

Jakub Growiec (Contact Author)

National Bank of Poland ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH)

aleja Niepodleglosci 162
PL-Warsaw, 02-554
Poland

Jakub Muck

National Bank of Poland - Department of Economics ( email )

00-919 Warsaw
Poland

Warsaw School of Economics (SGH) - Institute of Econometrics ( email )

Niepodleglosci 164
Warsaw, 02-554
Poland

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