Variable Factor Shares and the Index Number Problem: A Generalization
14 Pages Posted: 28 Sep 2016 Last revised: 15 Oct 2016
Date Written: August 18, 2016
Factor shares vary over time and across countries, so incorporating variable factor shares into growth and development accounting is both warranted and desirable. However, variable factor shares create an index number problem in analyses relying on our most commonly used production functions. We show that in the presence of competitive factor markets, the problem exists for all workhorse production functions exhibiting constant returns to scale. Therefore, any efforts to align empirical growth research with the reality of the factor share data cannot be carried out using standard techniques. New techniques need to be developed.
Keywords: Factor Shares, Growth Accounting, Production Function, Index Numbers
JEL Classification: O11, O30, O41, O47, E01, E25
Suggested Citation: Suggested Citation