That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity
Robert S. Chirinko
University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Steven M. Fazzari
Washington University in St. Louis
Andrew P. Meyer
Federal Reserve Bank of St. Louis, Research Division
CESifo Working Paper Series No. 1240
The elasticity of substitution between capital and labor features prominently in several areas of economic research. However, a consensus estimate remains elusive. We develop an estimation strategy that filters panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.
Number of Pages in PDF File: 47
JEL Classification: H32, E22working papers series
Date posted: August 6, 2004
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