Impact of Collinearity on Estimated Parameters of CES Production Function

Abstract

Abstract In many cases, the estimation of the parameters of CES production function is made with the help of Kmenta method. The respective method is frequently criticized especially because of two reasons: the approximation of the parameters is very near on the case of Cobb- Douglas production function and the impact of collinearity on the estimated parameters is usually high. This paper proposes a method to quantify the respective impact considering the values of coefficients of collinear refraction. The proposed improvements in the methodology of estimation and interpretation of CES production function parameters are applied in case of Romania during the period (1960-1979). The respective estimations offer an opportunity to reveal some features of production factors efficiency and their substitution during one of the important period for the base industrial structure building in Romania.