Capital-Energy Substitution and Shifts in Factor Demand: A Meta-Analysis

Tinbergen Institute Discussion Paper No. TI 06-061/3

25 Pages Posted: 17 Jul 2006

See all articles by Mark J. Koetse

Mark J. Koetse

Free University of Amsterdam - Department of Spatial Economics

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Raymond J.G.M. Florax

Purdue University; VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: July 2006

Abstract

This paper presents results of a meta-regression analysis on empirical estimates of capital-energy substitution. Theoretically it is clear that a distinction should be made between Morishima substitution elasticities and cross-price elasticities. The former represent purely technical substitution possibilities while the latter include an income effect and therefore represent economic substitution potential. We estimate a meta-regression model with separate coefficients for the two elasticity samples. Our findings suggest that primary model assumptions on returns to scale, technological change and separability of input factors matter for the outcome of a primary study. Aggregation of variables and the type of data used in empirical research are also relevant sources of systematic effect-size variation. Taking these factors into consideration, we compute ideal-typical elasticities for the short, medium and long run. The resulting figures clearly show that substitution elasticities are substantially higher than cross price elasticities. Therefore, despite considerable technical opportunities for capital-energy substitution, they are almost entirely outweighed by the negative income effect brought about by energy price increases; the short and medium run cross price elasticities are not statistically different from zero. In the long run this pattern does not hold. Our findings therefore suggest that actual changes in the demand for capital due to energy price increases take time.

Keywords: production function, capital-energy substitution, cross-price elasticity, Morishima substitution elasticity, meta-analysis

JEL Classification: C10, D24, D33, E23, O33, Q40

Suggested Citation

Koetse, Mark J. and de Groot, Henri L.F. and Florax, Raymond J.G.M., Capital-Energy Substitution and Shifts in Factor Demand: A Meta-Analysis (July 2006). Available at SSRN: https://ssrn.com/abstract=917113 or http://dx.doi.org/10.2139/ssrn.917113

Mark J. Koetse (Contact Author)

Free University of Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31(0)20 598 6168 (Phone)
+31(0)20 598 6004 (Fax)

Henri L.F. De Groot

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

Raymond J.G.M. Florax

Purdue University ( email )

West Lafayette, IN 47907-1145
United States
(765) 494-4300 (Phone)
(765) 494-9176 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~rflorax/

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 444 6092 (Phone)
+31 20 444 6004 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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