Constant Elasticity Of Substitution Research Articles

A theoretical analysis of the direct rebound effect caused by energy efficiency improvement of private consumers

This study systematically examines, with the aid of modern microeconomic theory, the theoretical foundations of the direct rebound effect caused by energy efficiency improvement of private consumers. It establishes a utility maximization problem for the private consumer and analyses consumer behaviors under different classical functional forms of household production, such as Cobb–Douglas, Leontief and Constant Elasticity of Substitution (CES) when energy efficiency improves at the household level. Furthermore, it builds upon existing knowledge of the rebound effect and proposes a generalized nested functional form of household production behavior allowing for understanding the energy efficiency improves of an appliance where energy is not the only input to produce a certain service, such as kilometers traveled. This study contributes to the theoretical literature in direct rebound effect and provides insights on the rebound break-even condition of the household production function. The backfire condition is also discussed under different functional forms of the household production function. It shows that under certain circumstances, where elasticity of substation is large, backfire will be unavoidable when energy efficiency improves.

Multilateral Methods, Substitution Bias, and Chain Drift: Some Empirical Comparisons

Multilateral methods are increasingly being used in the computation of official price indexes such as the consumer price index (CPI). This reflects the growing use of scanner data by statistical agencies and the fact that fixed‐based or chained price comparisons perform poorly in this context. A range of multilateral approaches have been pursued by different statistical agencies. Yet, it can be shown that some of these methods, at least theoretically, could suffer from substitution bias. We investigate this as well as the drivers of chain drift. We adopt a simulation‐based approach using actual scanner data prices with the corresponding quantities being generated assuming constant elasticity of substitution (CES) preferences. We find that most methods systematically deviate from the exact CES benchmark index. This is even the case for the superlative index methods, which should not exhibit substitution bias. Interestingly, we also find significant chain drift even in the exact CES indexes. We argue this reflects life cycle pricing and particularly run‐out sales at the end of a product's life.

Is cultural taste in Finland acquired from mother, father or both

The main goal of this paper is to address the importance of parental cultural taste in explaining cultural participation among older adults in Finland. The study considers the intergenerational transfer hypothesis and asks: Do middle-aged or older consumers inherit cultural tastes from their parents? How stable are these intergenerational transfer effects? Which parental hobbies are the most influential? A constant elasticity of substitution (CES) utility function is used to describe the structure of consumer preferences. The linear demand system to be estimated uses the seemingly unrelated systems (SUR) method with two equations. If the intergenerational transfer hypothesis is valid, parental interest in movies, pop music, classical music and visual arts should have a positive impact on their children’s demand for movies, rock or jazz music, classical music and art gallery visits, respectively. The results indicate that the intergenerational transfer hypothesis is valid. Children do indeed inherit their cultural habits and taste from their parents. We seem to visit similar cultural events to those that our parents do or did. The youngest age cohort is by far the most influenced by parental interest in classical music. The visual arts and pop music interests of parents seem to be second and third most influential hobbies but only when the youngest age cohorts are considered. Parental pop music and sport hobbies are the most influential sources when the cultural and sports participation of the middle-aged are studied. A mother’s visual arts interests and father’s sports interests are most important determinants of the cultural and sports participation decisions of the oldest age cohort. In general age, gender and education are important determinants of cultural participation. The youngest, who have less family constraints, are more active than the middle-aged and those over 55 are more active participants – except for filmgoing or rock music. Theatre attendance, arts gallery visits and classical music concert visits increase after age 45. Attending musicals is not dependent on education while all other cultural events are elite in terms of education, except rock music concerts, which well-educated parents, attend less than the reference group, which is students. Women are more active in all cultural activities studied here. Most of the intergenerational transfer effects are not stable throughout the child’s age. Only a mother’s classical music or visual art habits seem to have a stable and positive effect on the classical music concert participation and on the art gallery visits of the child regardless of age. However, a father’s corresponding classical music or visual art habits have a positive effect on their children, when they are aged between 15 and 35, attending classical music concerts and going to art galleries. Keywords : Intergenerational transfer, Cultural participation, Finland, CES. DOI: 10.7176/JCSD/62-07 Publication date: November 30 th 2020

How Does Immigration Affect Wages and the Unemployment Rate in Malaysia? A Computable General Equilibrium (CGE) Approach

Malaysia had approximately 2 million migrants in 2018, and this number was increasing dramatically by 25 percent in 2019. Parallels with the aims of country policy to reduce migrant workers' dependency in 2020, managing the workers needs to be clarified. At the same time, the country still needs to keep them for specific sectors. These issues motivate us to analyze the migrant worker's requirements at different levels of skills and wages. Using Computable General Equilibrium (CGE) modeling, at four-level nested CES production function, this study found high skilled migrants will harm wages for the high skilled and skilled groups while the opposite effect was observed for the semiskilled and low-skilled groups. However, when the migrant stock increases slightly below 1 percent, it will reduce the wages for semiskilled workers due to substitution effects. This study also found that the influx of low-skilled migrant workers will reduce salaries for semiskilled and low-skilled workers. The analysis also indicates that a small rise in high skilled immigrant labour will reduce the unemployment rate; likewise, increasing more than 4 percent will increase the unemployment rate. The results provide the policymaker guidelines to employ foreign workers' best skills to control the inequality of wages among skilled and low-skilled workers.

Non-tariff barriers removal in the Brazilian coffee industry

PurposeThis study aims to identify and classified non-tariff measures (NTMs) on Brazilian imports of robusta coffee beans, calculated a tariff-equivalent of non-tariff barriers (NTBs) and assessed the effects of removing NTBs from upstream and downstream domestic instant coffee supply chain.Design/methodology/approachThe analysis uses documentary research to identify NTMs and the price-wedge method is applied to estimate a tariff-equivalent. The effects of suppressing the tariff-equivalent were evaluated using a partial equilibrium model with constant elasticity of substitution (Armington, 1969) and by incorporating vertical integration and uncertainty (Hallren and Opanasets, 2018).FindingsThe results show that NTMs seemingly hinder the entrance of coffee beans into the domestic market. The tariff-equivalent was estimated at 13.61%. Suppressing it reveals that the share of domestic coffee beans used to produce domestic instant coffee falls 0.21 p.p. while the share of domestic instant coffee consumed by the international trade rises 8.60 p.p.Originality/valueWhat makes this paper original is that this paper investigated the effects of NTMs in a developing country, namely, Brazil. Although Brazil is one of the largest agricultural producers in the world, it has not appeared in literature in this type of analysis until now. Furthermore, it contributes to the literature on using existing techniques to investigate the impact of NTM removal on individual products in a specific country, in contrast to more recent papers that discuss using multi-country and multi-product data sets at the HTS-6 level. Thus, this paper demonstrates how a case study approach can be useful in quantifying policy changes.

Elasticity determinants of inequality-reducing income taxation

The link between income inequality and progressive taxation has long been considered a fundamental normative foundation for income tax progressivity. This paper furnishes necessary and sufficient conditions on primitives, in terms of the elasticity of income with respect to ability, under which various subclasses of progressive taxes are inequality reducing. The distributional effects of progressive income taxation are decomposed into two conditions on the wage elasticity of income, the tax rate effect and the subsidy effect, each capturing different aspects of the transition between before-tax and after-tax income distributions. The results confer a degree of useful flexibility to the theory, in that they allow the analyst to expand the universe of consumer preferences by suitably restricting the set of marginal-rate progressive taxes. As an illustration of the results’ practical implications, we provide a precise characterization of the subclass of (progressive) taxes that are inequality reducing for the constant elasticity of substitution (CES) and the quasi-linear utility functions.

Variable elasticity of substitution and economic growth in the neoclassical model

Abstract We study the effect of factor substitutability in the neoclassical growth model with variable elasticity of substitution. We consider two otherwise identical economies differing uniquely in their initial factor substitutability with Variable-Elasticity-of-Substitution (VES), Sobelow or Sigmoidal technologies. If the initial capital per capita is below its steady-state value, the economy with the higher initial elasticity of substitution will feature a higher steady-state income and capital per capita irrespective of whether the production technology is VES, Sobelow or Sigmoidal. Numerical results are provided to compare the effect of a higher elasticity of substitution in the Constant-Elasticity-of-Substitution (CES) model versus the models with variable-elasticity-of-substitution technology.

Extension operators for TU games and the Lovász extension

An extension operator assigns to any TU game its extension, a mapping that assigns a worth to any non-negative resource vector for the players. It satisfies three properties: linearity in the game, homogeneity of extensions, and the extension property. The latter requires the indicator vector of any coalition to be assigned the worth generated by this coalition in the underlying TU game. Algaba et al. (2004) advocate the Lovász extension (Lovász, 1983) as a natural extension operator. We show that it is the unique extension operator that satisfies two desirable properties. Resources of players outside a carrier of the game do not affect the worth generated. For monotonic games, extensions are monotonic. Further, we discuss generalizations of the Lovász extension using CES production functions.

Household utility maximization with life insurance: a CES utility case

We investigate the optimal consumption, portfolio, and life insurance decisions problem of a liquidity constrained household whose preference is given by the CES (constant elasticity of substitution) utility function. By applying the martingale and duality method, we obtain the closed-form solution for the household’s value function and optimal strategies. We provide a rigorous proof for the optimality of the strategies. We exhibit comparative static results of the optimal decisions with respect to the elasticity of substitution between consumption and leisure.

International reserves: self-insurance and monetary policy in crisis

PurposeThis work presents a model of a two-period economy to discuss the link between the precautionary motivation for holding international reserves and the country's monetary policy concerns due to a crisis.Design/methodology/approachThere are two possible states of nature in the second period of the economy: a normal state and a crisis state. These states of nature represent uncertainty to the policy maker and he can insure against a crisis. The household has a constant-elasticity-of-substitution (CES) utility function, where utility depends on consumption and money.FindingsBy allowing money in the utility function and in the household financial constraint and considering that the objective of the central bank is to smooth inflation, it is concluded that monetary policy plays a role in the precautionary motivation of holding international reserves.Practical implicationsThe model can be used to calculate optimal reserves holdings in its complete or even in its simplified version. Furthermore, it is possible to evaluate the impact of the intra-temporal substitution elasticity between consumption and real money in the decision of accumulating international reserves.Originality/valueHigher intra-temporal substitution elasticities implies in more insurance via international reserves, and this discussion is not found in the existent literature on international reserves.

Economic and climate impacts of reducing China's renewable electricity curtailment: A comparison between CGE models with alternative nesting structures of electricity

To mitigate climate change impacts and achieve low-carbon transformation, China has accelerated the development of renewable energy, which is severely challenged by the curtailment of renewable electricity. This study uses a dynamic multi-sectoral CGE model with alternative nesting structures and substitution elasticities for electricity with different power sources to capture the economic and environmental feasibility of reducing renewable electricity curtailment across all economic sectors in China. The reduction of renewable electricity curtailment is simulated during 2021–2030 from the curtailment rates of 2015–2017. We found that the reduction of renewable electricity curtailment would lead to a significant expansion in the output of renewable electricity and a moderate decrease in non-renewable electricity production. Among the renewable electricity, wind power has the most significant output gain (over 9%), with solar power and hydropower outputs rising by over 5% and 1.5%, respectively. However, without the cost-neutrality assumption, the impacts of reducing electricity curtailment would be largely over-estimated with CGE models simulated by improved technology. The disparity between results from the models with alternative nesting constant elasticity of substitution (CES) functions for electricity sectors is highly dependent on the difference between their substitution elasticities. Accompanying the changes in electricity generation, the reduction of renewable electricity curtailment would bring multiple green co-benefits like significantly reducing CO2 and air pollutants emitted from electricity sectors, and improvements in real GDP and employment.

The Origins of the CES Production Function

The CES production function was introduced to economics in the 1961 paper “Capital-Labor Substitution and Economic Efficiency,” by Kenneth Arrow, Hollis Chenery, Bagicha Minhas, and Robert Solow. The paper had an immediate and substantial impact on economic research, and the CES production function remains an important tool for both theoretical and empirical researchers. I review how the CES production function was derived and used in the paper, and, relying on archival sources, present a fine-grained account of the collaborative process that produced the paper. I also discuss the CES production function as an example of multiple simultaneous discovery and suggest reasons for its broad and rapid diffusion.

Macroeconomic Growth in Vietnam Transitioned to Market: An Unrestricted VES Framework

The Vietnamese economy has increased at high speed over the transformation decades; however, most recent studies on the economic growth of this country used the Cobb-Douglas or CES (Constant Elasticity of Substitution) production functions, which are unable to explore the relationship between the elasticity of capital-labour substitution and development process, and hence, are not relevant to accessing a dynamic economic system. For that reason, this study is conducted to specify an unrestricted VES (Variable Elasticity of Substitution) production function in a one-sector growth model of Vietnam, highlighted by two characteristics: successful transition from plan to market and rapid progress. The VES is given preference over the CES and the Cobb-Douglas having the elasticity of substitution between capital and labour varying with economic development. By employing a Bayesian nonlinear regression through MCMC methods, the study reported the following findings: (1) the above-unity variable elasticity of capital-labour substitution in an aggregate unrestricted VES function specified for Vietnam shows that the model generates the possibility of endogenous economic growth; (2) the capital share tends to increase, while the labour share faces a downward trend along with the development of Vietnam; (3) the VES is empirically proven through a Bayes factor test to be superior to the CES and Cobb-Douglas for analysis of the growth process of Vietnam, an emerging transition economy.

Production network structure, service share, and aggregate volatility

This paper shows that GDP growth volatility declines with production network diversification. To account for this evidence, I build a multisector model with CES technologies and a cost of complexity in the bundle of intermediates. Production network diversification decreases volatility when intermediate inputs and labor are substitute inputs. U.S. sectoral data suggest that labor and intermediates are substitutes in service sectors. Therefore, a calibrated model that then also matches each country's production network can quantitatively generate the empirical patterns. The model also explains why service-oriented countries are less volatile: service sectors have a more diversified set of suppliers.

Do Regulatory Measures Necessarily Affect Oman’s Seafood Export-Supply?

This article examines the influence of relative prices, production capacity, gross domestic product, fish export and trawl fishing bans, and seasonality on Oman’s fish exports to the European Union (EU), Southeast-, East- and South Asia (SEA), and the Gulf Cooperation Council (GCC) markets during 2001–2015. Following the prescribed “keep it sensibly simple” rule for practitioners and the lack of any empirical evidence to support better alternatives, a partial adjustment framework is used to describe the dynamics of fish export behavior. The appropriate functional form was decided by testing the nested Cobb–Douglas (CD) hypothesis within the constant elasticity of substitution (CES) specification and the result supports the CD specification. The models were estimated using ordinary least square (OLS). The descriptive statistical results indicate market heterogeneity in species preferences. The empirical results suggest some degree of inertia in adjustment in the EU and SEA markets. The negative impact of the “export ban” on the EU market suggests a “trade-off” between the protection of domestic consumers and the revenue forgone. The export is price elastic in the short-run for the EU market. The impact of the “trawl fishing ban” on the EU and GCC markets was negative and positive, respectively. The significance of “production capacity” for the GCC and SEA markets signals that future enhancement strategies of exports should be aligned with the long-term sustainability of fish resources. The error-correction model could be considered to check the robustness of the present findings. An examination of the sensitivity of export-supply to potential risks should also be useful.

Testing the Technology of Human Capital Production: A General‐to‐Restricted Framework

AbstractStudies of childhood development have suggested human capital is accumulated in complex and nonlinear ways. Nonetheless, empirical analyses of this process often impose a linear functional form. This paper investigates which technology assumptions matter in quantitative models of human capital production. I propose a general‐to‐restricted procedure to test the production technology, placing constraints on a modified McCarthy function, from which transcendental, constant elasticity of substitution, log‐linear and linear models are obtained as special cases. Applying the procedure to data on child height from the Young Lives surveys, as well as cognitive skills, I find that the technology of human capital production is neither log‐linear nor linear‐in‐parameters; rather, past and present inputs act as complements. I recommend that maintained hypotheses underlying functional form choices should be tested on a routine basis.

WHAT DETERMINES THE ELASTICITY OF SUBSTITUTION BETWEEN CAPITAL AND LABOR? A LITERATURE REVIEW

AbstractThis paper provides the first comprehensive review of the empirical and theoretical literature on the determinants of the elasticity of substitution between capital and labor. Our focus is on the two‐input constant elasticity of substitution (CES) production function. We start by presenting four concise observations that summarize the empirical literature on the estimation of . Motivated by these observations, the main part of this survey then focuses on potential determinants of capital–labor substitution. We first review several approaches to the microfoundation of production functions where the elasticity of substitution (EOS) is treated as a purely technological parameter. Second, we outline the construction of an aggregate elasticity of substitution (AES) in a multi‐sectoral framework and investigate its dependence on underlying intra‐ and inter‐sectoral substitution. Third, we discuss the influence of the institutional framework on the extent of factor substitution. Overall, this survey highlights that the effective elasticity of substitution (EES), which is typically estimated in empirical studies, is generally not an immutable deep parameter but depends on a multitude of technological, non‐technological, and institutional determinants. Based on these insights, the final section identifies a number of potential empirical and theoretical avenues for future research.

Does a better diet reduce dependence on imports? The case of Tunisia

AbstractIn the last 40 years, Tunisia has experienced—as many other developing and emerging countries—a dietary transition, which led to an increase in the consumption of sugar, fats, and animal products. This transition was accompanied by an increase in noncommunicable diseases, particularly cardiovascular diseases. Using mathematical programming, we optimized the Tunisian diet using the French dietary recommendations as constraints. Then, we used the Global Trade Analysis Project's constant elasticities of substitution in order to simulate the impact of fulfilling the nutrient recommendations on international trade and domestic supply. Using this approach, we showed that the Tunisian diet is rich in carbohydrates and sugar but lacks fibers, some minerals, and vitamins. The adherence to all recommendations would induce an imperative shift to less sugar and cereal‐based products by reducing the import dependence on these products, but would result a dramatic increase in the domestic supply of products from animal origin, fruits, vegetables, and legumes.

Endogenous Economic Growth: The Arrow-Romer Theory and a Test on Vietnamese Economy

The Arrow-Romer growth model helped to overcome the main drawback of the Solow-Swan model, where technical change is created exogenously, not by the firms making decisions, and formulated the conditions for endogenous growth in an economy. Nonetheless, the presentation of the Arrow-Romer model and corresponding empirical studies by the Cobb-Douglas functions hides the role of the capital-labor relationship for economic growth. A constant elasticity of substitution (CES) function, constructed by Arrow et al. (1961), allows solving this problem. So, the purpose of the current research is to test the endogenous growth of the Vietnamese economy, which has experienced a more than 30-year market-oriented reform through specifying an aggregate CES function. By applying Bayesian nonlinear regression, the research results revealed the elasticity of factor substitution (ES) lower than one. This work theoretically and empirically contributes to the endogenous growth theory in problems concerned with emerging economies. Investments in physical and human capital and technological progress are the determinants of endogenous growth. From the findings obtained, the author concludes that even though having achieved a rather impressive growth rate over more than three decades, the Vietnamese economy has not yet generated the possibility of endogenous growth, and suggests that endogenous growth can be hardly generated in emerging economies like Vietnam if important growth policies related to accumulation of physical and human capital as well as enhancement of R&D activities are not simultaneously implemented. It is indispensable to focus on substantially improving institutional quality.

Estimating elasticities of substitution with nested CES production functions: Where do we stand?

Abstract Prompt by an increasing interest by climate change modelers, a rich literature estimating elasticities of substitution in a nested CES production framework has recently developed. This article reviews such literature. We critically describe the nesting structures, estimation approaches, data sources and aggregation, econometric techniques, and types of substitution elasticities used by previous literature, to offer a comprehensive description of the various options available to a researcher attempting this estimation. We also provide suggestions for potential improvements to the estimation process. In particular, we warn researchers to use CES production functions with caution in empirical applications given their restrictive build-in assumptions.