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

33 Pages Posted: 26 Jun 2008

See all articles by Shekhar S. Aiyar

Shekhar S. Aiyar

International Monetary Fund (IMF)

Carl‐Johan Dalgaard

University of Copenhagen - Department of Economics

Date Written: June 26, 2008

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.

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: https://ssrn.com/abstract=1151790 or http://dx.doi.org/10.2139/ssrn.1151790

Shekhar S. Aiyar

International Monetary Fund (IMF) ( email )

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Carl-Johan Lars Dalgaard (Contact Author)

University of Copenhagen - Department of Economics ( email )

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