Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105559
Authors: 
León-Ledesma, Miguel A
McAdam, Peter
Willman, Alpo
Year of Publication: 
2012
Series/Report no.: 
School of Economics Discussion Papers 1204
Abstract: 
Capital-labor substitution and TFP estimates are essential features of many economic models. Such models typically embody a balanced growth path. This often leads researchers to estimate models imposing stringent prior choices on technical change. We demonstrate that estimation of the substitution elasticity and TFP growth can be substantially biased if technical progress is thereby mis-specified. We obtain analytical and simulation results in the context of a model consistent with balanced and near-balanced growth (i.e. departures from balanced growth but broadly stable factor shares). Given this evidence, a Constant Elasticity of Substitution production function system is then estimated for the US economy. Results show that the estimated substitution elasticity tends to be significantly lower using a factor-augmenting specification (well below one). We are also able to reject conventional neutrality forms in favor of general factor augmentation with a non-negligible capital-augmenting component. Our work thus provides insights into production and supply-side estimation in balanced-growth frameworks.
Subjects: 
Balanced Growth
Technical Progress Neutrality
Factor Income share
Constant Elasticity of Substitution
Factor-Augmenting Technical Change
JEL: 
C15
C32
E23
O33
O51
Document Type: 
Working Paper

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