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BIASED TECHNICAL CHANGE, SCALE, AND FACTOR SUBSTITUTION IN U.S. MANUFACTURING INDUSTRIES

Published online by Cambridge University Press:  15 January 2016

Xi Chen
Xi Chen*
Affiliation:
STATEC
*
Address correspondence to: Xi Chen, STATEC (Institut national de la statistique et des études économiques du Grand-Duché du Luxembourg), B.P. 304, L-2013 Luxembourg; e-mail: xi.chen@statec.etat.lu.
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Abstract

Although a realistic characterization of the production function is critical to macroeconomic analysis, estimating the function's characteristics is hampered by both data limitations and methodological difficulties. In this paper, I develop a new empirical strategy for estimating the CES production function with biased technical change. The proposed method extends the control function approach to the CES specification to address endogeneity concerns and is able to retrieve sector-specific and time-varying estimates of technical change. Using data from U.S. manufacturing industries, I find evidence that (i) the production technology exhibits nonincreasing returns to scale, (ii) the elasticity of substitution between capital and labor is below unity, and (iii) technical change is generally labor-augmenting along the balanced growth path.

Keywords

Elasticity of SubstitutionReturns to ScaleBiased Technical ChangeControl Function Approach
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 2 , March 2017 , pp. 488 - 514
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

This paper is based on Chapter 3 of my Ph.D. thesis at the University of Strasbourg. I would like to thank Bertrand Koebel, François Laisney, the Editor, and two anonymous referees for very helpful comments.

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