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Accounting for Productivity: Is it Ok to Assume that the World is Cobb-Douglas?

Shekhar S. Aiyar
International Monetary Fund (IMF)

Carl-Johan Lars Dalgaard
University of Copenhagen - Department of Economics


June 26, 2008

Univ. of Copenhagen Dept. of Economics Discussion Paper No. 08-14

Abstract:     
The development accounting literature almost always assumes a Cobb-Douglas (CD) production function. However, if in reality the elasticity of substitution between capital and labor deviates substantially from 1, the assumption is invalid, potentially casting doubt on the commonly held view that factors of production are relatively unimportant in accounting for differences in labor productivity. We use international data on relative factor shares and capital-output ratios to formulate a number of tests for the validity of the CD assumption. We find that the CD specification performs reasonably well for the purposes of cross-country productivity accounting.

Working Paper Series

Date posted: June 26, 2008 ; Last revised: June 26, 2008

Suggested Citation

Aiyar, Shekhar S. and Dalgaard, Carl-Johan Lars, Accounting for Productivity: Is it Ok to Assume that the World is Cobb-Douglas? (June 26, 2008). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 08-14. Available at SSRN: http://ssrn.com/abstract=1151790


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Contact Information

Carl-Johan Lars Dalgaard (Contact Author)
University of Copenhagen - Department of Economics ( email )
Building 26
Ă˜ster Farimagsgade 5
Copenhagen K. DK-1353
Denmark
+45 3532 4407 (Phone)
Shekhar S. Aiyar
International Monetary Fund (IMF) ( email )
700 19th Street NW - HQ 5-403
Washington, DC 20431
United States
202-623-8638 (Phone)
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