The Long and Short of it
37 Pages Posted: 27 Feb 2008
Date Written: February 1, 2008
Research on the elasticity of substitution between capital and labor - à3C3 - has been proceeding for 75 years. While there is clearly a strong case for the importance of à3C3 in the analysis of growth and other economic issues, much less agreement exists on the value of à3C3. This paper offers some perspectives on prior estimates of à3C3, emphasizing the fundamental tension between the short-run data that are available and the long-run parameter that is required. Estimates of à3C3 based on various short-run and long-run models are discussed and, while the estimates range widely, the weight of the evidence suggests a value of à3C3 in the range of 0.40 to 0.60. There is little evidence to sustain the assumption of a Cobb-Douglas production function.
Keywords: production, function, capital formation, economic growth, estimating long-run relations
JEL Classification: E22, C20
Suggested Citation: Suggested Citation