Abstract
Most studies in Vietnam use the Cobb-Douglas production function and its modifications for economic analysis. Extremely rigid presumptions are a main weak point of this functional form, particularly if the elasticity of factor substitution (ES) is equal to one, which hides the role of the ES for economic growth. The CES (constant elasticity of substitution) production function with more flexible presumptions, concretely its ES, is not unitary, and has been used more and more widely in economic investigations. So, this study is conducted to estimate the average ES through the specification of an aggregate CES function for the Vietnamese nonfinancial enterprises. By performing Bayesian nonlinear mixed-effects regression via Random-walk Metropolis Hastings (MH) algorithm, based on the data set of the listed nonfinancial enterprises of Vietnam, the author found that the CES function estimated for the researched enterprises has an ES lower than one, i.e., capital and labor are complimentary. This finding shows that Vietnamese nonfinancial enterprises can confront a downward trend of output growth.
Highlights
Since appearing in 1928, the Cobb-Douglas function has been a highly crucial tool in economic research
The CES was chosen over the Cobb-Douglas because its premises are more flexible, and in particular, its elasticity of factor substitution (ES) shall have useful implications for economic growth
The results of the statistical tests point out that our estimated model is consistent with the observed data
Summary
Since appearing in 1928, the Cobb-Douglas function has been a highly crucial tool in economic research. This functional form has become very popular due to its ease of use and empirical adaptation to different data sets. Solow (1957) and his followers used the Cobb-Douglas in their growth theories This type of function is criticized because of its rigid premises. Ferguson (1965), La Grandville (1989), Klump and Grandville (2000), Pitchford (1960), Azariadis (1993), and Galor (1995) focussed on the effects of the ES on economic growth. In Vietnam, to the knowledge of the author, the Cobb-Douglas function and its different modifications are commonly used, and at present, no empirical research on the CES function has been carried out. Most previous research on production functions applied mainly traditional quantitative methods, such as the accounting method or the frequentist approach, being a subject of much criticism from modern statisticians as it gave unreliable results in many cases (Briggs and Nguyen 2019; Anh et al 2018; Kreinovich et al 2019)
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