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Abstract
THE ORIGINAL SPECIFICATION of the constant-elasticity-of-substitution (CES) production function by Arrow, Chenery, Minhas, and Solow [1] was restricted to the case of constant returns to scale. With this restriction it is possible to estimate the elasticity of substitution from the marginal productivity condition by regressing the value of production per worker on wage rate (both variables measured in logarithms). If, however, the CES production function is generalized to allow for the possibility of non-constant returns to scale, this method of estimation is no longer feasible. The purpose of this paper is to consider estimation procedures applicable to the generalized version of the CES function under various circumstances. An obvious starting point is to consider estimates obtained by fitting the production function to observations on output and inputs alone. These estimates are consistent if the input variables are non-stochastic or, if stochastic, independent of the disturbance in the production function. The CES function can be written in the form
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