Estimation of Substitution Elasticities in Three-Factor Production Functions: Identifying the Role of Energy

FCN Working Paper No. 1/2016

41 Pages Posted: 7 Apr 2016 Last revised: 22 May 2017

See all articles by Julius Frieling

Julius Frieling

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN)

Reinhard Madlener

RWTH Aachen University

Date Written: September 2016

Abstract

Existing estimation methods for multi-factor CES functions require limiting assumptions about the nature of technical change. We demonstrate how a system of equations and a fixed elasticity in the nested process can provide identification for more flexible specifications and for small data samples. We evaluate the role of energy inputs in an aggregate production function using data for Germany. The use of a Cobb-Douglas process for capital and labor by other studies biases elasticity estimates upwards. The estimated low elasticity means that energy availability is a potentially limiting factor for growth and that productivity gains for capital and labor are energy-using.

Keywords: technical change, multifactor production, energy demand, aggregate production

JEL Classification: C30, E23, O41, O47, Q43

Suggested Citation

Frieling, Julius and Madlener, Reinhard, Estimation of Substitution Elasticities in Three-Factor Production Functions: Identifying the Role of Energy (September 2016). FCN Working Paper No. 1/2016. Available at SSRN: https://ssrn.com/abstract=2759380 or http://dx.doi.org/10.2139/ssrn.2759380

Julius Frieling (Contact Author)

RWTH Aachen University - Institute for Future Energy Consumer Needs and Behavior (FCN) ( email )

Mathieustrasse 6
Aachen, 52074
Germany

Reinhard Madlener

RWTH Aachen University ( email )

School of Business and Economics / E.ON ERC
Mathieustra├če 10
Aachen, 52074
Germany
+49 241 80 49 820 (Phone)
+49 241 80 49 829 (Fax)

HOME PAGE: http://www.eonerc.rwth-aachen.de/fcn

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