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Production technology estimates and balanced growth

León-Ledesma, MA, Mcadam, P and Willman, A (2015) Production technology estimates and balanced growth Oxford Bulletin of Economics and Statistics, 77 (1). pp. 40-65.

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© 2013 The Department of Economics, University of Oxford and John Wiley & Sons Ltd.Capital-labour substitution and total factor productivity (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 favour 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.

Item Type: Article
Subjects : Economics
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
Date : 1 January 2015
Identification Number : 10.1111/obes.12049
Copyright Disclaimer : Copyright 2015 Wiley
Depositing User : Symplectic Elements
Date Deposited : 27 Jul 2016 16:49
Last Modified : 27 Jul 2016 16:49

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