That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity

47 Pages Posted: 6 Aug 2004

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Steven M. Fazzari

Washington University in St. Louis

Andrew P. Meyer

Federal Reserve Bank of St. Louis, Research Division

Date Written: July 2004

Abstract

The elasticity of substitution between capital and labor features prominently in several areas of economic research. However, a consensus estimate remains elusive. We develop an estimation strategy that filters panel data in an original way and avoids several pitfalls - difficult-to-specify dynamics, transitory time-series variation, and positively sloped supply schedules - inherent in investment equations that can bias the estimated elasticity. Results are based on an extensive panel containing 1,860 manufacturing and non-manufacturing firms. Our model generates a precisely estimated elasticity of approximately 0.40. The method developed here may prove useful in estimating other structural parameters from panel datasets.

JEL Classification: H32, E22

Suggested Citation

Chirinko, Robert S. and Fazzari, Steven M and Meyer, Andrew P., That Elusive Elasticity: A Long-Panel Approach to Estimating the Capital-Labor Substitution Elasticity (July 2004). CESifo Working Paper Series No. 1240. Available at SSRN: https://ssrn.com/abstract=573246

Robert S. Chirinko (Contact Author)

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Steven M Fazzari

Washington University in St. Louis ( email )

One Brookings Drive
St. Louis, MO 63130
United States
314-935-5693 (Phone)
314-935-4156 (Fax)

Andrew P. Meyer

Federal Reserve Bank of St. Louis, Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-4647 (Phone)

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