Estimation of Sectoral Elasticities of Substitution Along the International Technology Frontier

Abstract

Sectoral heterogeneity is crucial to address several economic questions. This paper provides a detailed mapping of sectoral production possibility frontiers, using different nesting structures and levels of aggregation (primary, secondary, tertiary activities and energy-intensive firms). Elasticities of substitution between capital, labour and energy are identified by employing an international multi-sector dataset, accounting for biased technological change and normalising the production function to clusters of observations. Complementarity dominates, with the noteworthy exception of the capital-labour composite, close to Cobb-Douglas. I also present some stylized facts relating substitution elasticities to sectoral characteristics.

Keywords: Constant Elasticity of Substitution, Normalisation, Sectoral Disaggregation, Nested CES Structure, Energy Demand

JEL Classification: C68, O14, O41, Q43