Substitution Elasticities in a CES Production Framework - An Empirical Analysis on the Basis of Non-Linear Least Squares Estimations

25 Pages Posted: 4 Mar 2012 Last revised: 5 Sep 2012

See all articles by Simon Koesler

Simon Koesler

ZEW – Leibniz Centre for European Economic Research - Environmental and Resource Economics, Environmental Management Research

Michael Schymura

ZEW – Leibniz Centre for European Economic Research

Date Written: 2012

Abstract

Effectiveness, cost-efficiency and distribution issues are crucial for any form of future regulation. This results in the need for reliable instruments to assess regulations ex ante. Elasticities are key parameters for such instruments. We consistently estimate substitution elasticities for a three level nested CES KLEM production structure on the basis of non-linear least squares estimation procedures. Thereby we take advantage of the new World-Input-Output Database. This allows us for the first time to use one consistent dataset for the estimation process and gives us the opportunity to derive elasticities from the same data which researchers can use to calibrate their simulations. Our results show that compared to standard linear estimations using Kmenta approximations, non-linear estimation techniques perform significantly better. Moreover, during the time period we consider, no significant change in input substitutability takes place over time. Furthermore, we demonstrate that the common practice of using Cobb-Douglas or Leontief production functions in economic models must be rejected for the majority of sectors. In response to this result, we provide a comprehensive set of consistently estimated substitution elasticities covering 35 sectors.

Keywords: Substitution elasticity, CES production function, Policy evaluation

JEL Classification: C54, C68, D50, Q50

Suggested Citation

Koesler, Simon and Schymura, Michael, Substitution Elasticities in a CES Production Framework - An Empirical Analysis on the Basis of Non-Linear Least Squares Estimations (2012). ZEW - Centre for European Economic Research Discussion Paper No. 12-007, Available at SSRN: https://ssrn.com/abstract=2014655 or http://dx.doi.org/10.2139/ssrn.2014655

Simon Koesler (Contact Author)

ZEW – Leibniz Centre for European Economic Research - Environmental and Resource Economics, Environmental Management Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim
Germany

Michael Schymura

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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