The Elasticity of Substitution: Evidence from a UK Firm-Level Data Set
Sebastian N. Barnes
Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)
City University London - Department of Economics; Bank of England
Bank of England - Monetary Analysis
April 1, 2008
Bank of England Working Paper No. 348
Using a panel of UK firms spanning three decades, we provide estimates of the long-run elasticity of substitution between capital and other factors of production, the (negative of the) elasticity of capital and investment with respect to the user cost. The parameter is estimated using 'time averages' (with data differenced over long periods) and pooled mean group panel methods. The robust result is that the elasticity is in the region of 0.4. This is consistent with previous results obtained using aggregate UK data, and is also in line with some recent results using US firm-level data. Estimated returns to scale exceed unity. When constant returns are imposed, the estimated elasticity of substitution is not substantially changed.
Number of Pages in PDF File: 51
Keywords: Investment, firm-level data, elasticity of substitution, panel
JEL Classification: E20, E22working papers series
Date posted: October 11, 2008
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