Path-Dependency and Input Substitution: Implications for Energy Policy Modelling

Posted: 27 Dec 2003

See all articles by Gerard H. Kuper

Gerard H. Kuper

University of Groningen - Faculty of Economics and Business

Daan van Soest

Tilburg University - CentER & Department of Economics

Abstract

In most policy-oriented energy models, the effectiveness of energy policy instruments crucially depends both on the values of the substitution elasticities between the various inputs and on the rates of technological progress. In this paper, we argue that due to the fixed-cost nature of adjustments to relative price changes, these technological parameters are affected by past developments. Failing to account for the role of history will result in biased parameter estimates, and hence the implication for energy policy modelling is that the estimation period should be carefully selected. We provide an empirical illustration using data for the Netherlands.

Keywords: Input substitution, Path-dependency, Energy policy

JEL Classification: O30, Q33, Q48

Suggested Citation

Kuper, Gerard H. and van Soest, Daan P., Path-Dependency and Input Substitution: Implications for Energy Policy Modelling. Energy Economics, Vol. 25, No. 4, pp. 397-407, 2003. Available at SSRN: https://ssrn.com/abstract=480022

Gerard H. Kuper

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Daan P. Van Soest (Contact Author)

Tilburg University - CentER & Department of Economics ( email )

P.O. Box 90153
5000 LE Tilburg
Netherlands
+31 13 466 2072 (Phone)

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