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ISOELASTIC ELASTICITY OF SUBSTITUTION PRODUCTION FUNCTIONS

Published online by Cambridge University Press:  28 February 2019

Jakub Growiec Open the ORCID record for Jakub Growiec [Opens in a new window]  and
Jakub Mućk Open the ORCID record for Jakub Mućk [Opens in a new window]
Jakub Growiec*
Affiliation:
SGH Warsaw School of Economics and Narodowy Bank Polski
Jakub Mućk
Affiliation:
SGH Warsaw School of Economics and Narodowy Bank Polski
*
Address correspondence to: Jakub Growiec, Szkoła Główna Handlowa w Warszawie, Katedra Ekonomii Ilościowej, al. Niepodległości 162, 02-554 Warszawa, Poland; e-mail: jakub.growiec@sgh.waw.pl. Phone/Fax: (+48) 225649322.
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Abstract

We generalize the normalized constant elasticity of substitution (CES) production function by allowing the elasticity of substitution to vary isoelastically with (i) the relative factor share, (ii) the marginal rate of substitution, (iii) the capital–labor ratio, (iv) the capital share, (v) the capital’s rate of return, or (vi) the capital–output ratio. Ensuing isoelastic elasticity of substitution (IEES) functions have intuitively and analytically desirable properties, for example, self-duality. Empirically, for the post-war US economy we robustly reject the CES specification in favor of the IEES alternative. Assuming the IEES production structure we find that the capital–labor elasticity of substitution has remained around 0.8–0.9 from 1948 to the 1980s, followed by a period of secular decline.

Keywords

Production FunctionFactor ShareElasticity of SubstitutionFactor-Augmenting Technical Change
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 7 , October 2020 , pp. 1597 - 1634
Copyright
© Cambridge University Press 2019

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Footnotes

We are grateful to the Associate Editor, two anonymous Referees, Peter McAdam and Ingmar Schumacher, participants of the 2015 CEF conference (Taipei), 2015 WIEM conference (Warsaw), 2016 MMF conference (Bath), 2016 NBP Summer Workshop, and seminars in Copenhagen (University of Copenhagen, MEHR seminar), Luxembourg and Warsaw (Warsaw Economic Seminars), for their useful comments and discussions. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. The views expressed herein belong to the authors and have not been endorsed by Narodowy Bank Polski.

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