The Microeconomic Foundations of Aggregate Production Functions

61 Pages Posted: 26 Nov 2018 Last revised: 10 Feb 2023

See all articles by David Rezza Baqaee

David Rezza Baqaee

London School of Economics & Political Science (LSE) - London School of Economics

Emmanuel Farhi

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2018

Abstract

Aggregate production functions are reduced-form relationships that emerge endogenously from input-output interactions between heterogeneous producers and factors in general equilibrium. We provide a general methodology for analyzing such aggregate production functions by deriving their first- and second-order properties. Our aggregation formulas provide non-parameteric characterizations of the macro elasticities of substitution between factors and of the macro bias of technical change in terms of micro sufficient statistics. They allow us to generalize existing aggregation theorems and to derive new ones. We relate our results to the famous Cambridge-Cambridge controversy.

Suggested Citation

Baqaee, David Rezza and Farhi, Emmanuel, The Microeconomic Foundations of Aggregate Production Functions (November 2018). NBER Working Paper No. w25293, Available at SSRN: https://ssrn.com/abstract=3290428

David Rezza Baqaee (Contact Author)

London School of Economics & Political Science (LSE) - London School of Economics

United Kingdom

Emmanuel Farhi

Harvard University - Department of Economics ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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