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Production Technology Estimates and Balanced Growth
Author(s) -
LeónLedesma Miguel A.,
McAdam Peter,
Willman Alpo
Publication year - 2015
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12049
Subject(s) - economics , total factor productivity , elasticity of substitution , factor shares , constant elasticity of substitution , econometrics , technical change , elasticity (physics) , production (economics) , substitution (logic) , production function , context (archaeology) , output elasticity , solow residual , growth model , function (biology) , microeconomics , productivity , macroeconomics , growth accounting , computer science , thermodynamics , paleontology , physics , biology , programming language , evolutionary biology
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.