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American Economic Review: Vol. 100 No. 4 (September 2010)

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Identifying the Elasticity of Substitution with Biased Technical Change

Article Citation

León-Ledesma, Miguel A., Peter McAdam, and Alpo Willman. 2010. "Identifying the Elasticity of Substitution with Biased Technical Change." American Economic Review, 100(4): 1330-57.

DOI: 10.1257/aer.100.4.1330

Abstract

The capital-labor substitution elasticity and technical biases in production are critical parameters. The received wisdom claims their joint identification is infeasible. We challenge that interpretation. Putting the new approach of "normalized" production functions at the heart of a Monte Carlo analysis we identify the conditions under which identification is feasible and robust. The key result is that jointly modeling the production function and first-order conditions is superior to single-equation approaches especially when merged with "normalization." Our results will have fundamental implications for production-function estimation under non-neutral technical change, for understanding the empirical relevance of normalization and variability underlying past empirical studies. (JEL E22, O33, O41)

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Authors

León-Ledesma, Miguel A. (U Kent)
McAdam, Peter (European Central Bank)
Willman, Alpo (European Central Bank)

JEL Classifications

E22: Capital; Investment; Capacity
O33: Technological Change: Choices and Consequences; Diffusion Processes
O41: One, Two, and Multisector Growth Models


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