An Estimation of Industry-Level Capital-Labor Substitution Elasticities for U.S. Production: An Argument for Cobb-Douglas
USITC Economics Working Paper No. 2001-11-C
26 Pages Posted: 8 Dec 2001
Date Written: January 2002
A key parameter that determines the distributional impacts of a policy shift in general equilibrium simulations is the elasticity of substitution between capital and labor. Using a rich new data set by the Bureau of Economic Analysis, we estimate substitution elasticities for 28 industries and provide an indication of the long- and short-run estimates. Given the structure of most growth models, we posit that the relationship between capital and labor is likely to be close to Cobb-Douglas. Our findings lend support to the Cobb-Douglas specification as a transparent starting point in simulation analysis.
Keywords: Production substitution elasticities, computable general equilibrium modeling
JEL Classification: C20, C22, C68
Suggested Citation: Suggested Citation