The Fisher/Cobb-Douglas Paradox, Factor Shares, and Cointegration
13 Pages Posted: 11 Jun 2007
Date Written: May 2007
This note uses insights from cointegration analysis to reexamine two separate but related issues concerning the estimation of production function parameters. Fisher (1971) documented a paradox in estimating substitution elasticities -- the puzzling divorce between the technology underlying his simulated data and the technology estimated from these data. This note both resolves the Paradox and, based on this resolution, raises important questions about estimation strategies (pioneered by Caballero, 1994) that rely on cointegration to recover production function parameters.
Keywords: production function elasticities, cointegration
JEL Classification: C22, E23
Suggested Citation: Suggested Citation