Factor substitution approach to testing the time variations in production: the case of Taiwan's manufacturing

Abstract

This paper is devoted to studying the time variations in the series of elasticities of factor substitution, which in a sense manifests changes in production technology and structure. A LKM translog cost function model is used to estimate the Allen–Uzawa elasticities of substitution for Taiwan’s manufacturing sector in 1965–91. The variations are analysed using a regression model which incorporates the linear spline setting and income variable. Empirical results indicate that obvious structural breaks in the elasticity series conform to major exogenous disturbances such as worldwide energy crises and developmental policy changes.