Econometric Estimation of Nested Production Functions and Testing in a Computable General Equilibrium Analysis of Economy-Wide Rebound Effects

Abstract

Quantitative models, such as computable general equilibrium (CGE), that are increasingly used to inform policy processes rely on a number of assumptions concerning how good and services are produced. Previous research has shown that the elasticity of substitution between inputs and the structure in which these inputs interact can have large impacts on model output. However, the choice of elasticities and production structure is often made without the support of statistical evidence. This research aims to address these points by estimating nesting structure and the elasticities of substitution therein across a number of sectors in the UK then testing the implications of introducing these estimates to parameterise a CGE model that is then used to simulation the economy-wide impacts of increased efficiency in the productive use of energy.

Keywords: general equilibrium, KLEM production function, separability assumptions

JEL Classification: C68, D57, D58, R15, Q41, Q43