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GTAP Resource #901

"An Estimation of Industry-Level Capital-Labor Substitution Elasticities: Support for Cobb-Douglas"
by Balistreri, Edward J., Christine Mcdaniel and Eina V. Wong

A key parameter that determines the distributional impacts of a policy shift in general equilibrium models is the elasticity of substitution between capital and labor. Despite the importance of this parameter in applied modeling, its identification continues to pose a challenge. Given the structure of most growth models, we posit that the true relationship between capital and labor is likely to be close to Cobb–Douglas. Using a rich new data set from the Bureau of Economic Analysis (BEA), we estimate substitution elasticities for 28 industries that cover the entire economy, and provide an indication of the long- and short-run ranges of those estimates. We fail to reject the Cobb–Douglas specification in 20 of the 28 industries. These findings lend support to the Cobb–Douglas specification as a transparent starting point in simulation analysis.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
Status: Published
By/In: The North American Journal of Economics and Finance, 14(3) 343-356
Date: 2003
Created: Bacou, M. (12/10/2001)
Updated: Balistreri, E. (8/27/2007)
Visits: 1,685
- Labor market issues
- Calibration and parameter estimation
- North America

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