Elasticity Of Substitution Research Articles

The Impact of Extending Employment Protection to Agency Workers on Firms

We study the impact of a reform that extended employment protection to temporary agency workers. Using a difference-in-difference research design, we show that plants more exposed to the regulation experienced a decrease in revenues and total employment, and that the latter effect was attenuated in industries with high elasticity of substitution between agency and nonagency workers. We also find that labor misallocation increased as a consequence of the regulation. A model of labor demand in the presence of agency work rationalizes these results. (JEL J22, J23, J31, K31, L60, M51, O15)

Can factor substitution reduce the shadow price of air pollution embodied in international trade? A worldwide perspective.

The calculation of trade-embodied air pollution (TEAP) and its economic losses can be reasonably used to assess the impact of transboundary air pollution. However, these air pollutants, which are associated with international trade, can be easily ignored due to their concealment. Based on this, the global multiregional input‒output model (MRIO) is used to quantify the volume of five air pollutants that are embodied in the trade of 20 countries from 2000 to 2016. Then, the shadow price of trade-embodied air pollution (SPTEAP) and the elasticity of factor substitution (EFS) are both calculated by applying the translog production function. Finally, impulse response analysis is used to study the dynamic impact of EFS on the SPTEAP. The main conclusions are as follows: (1) All countries experienced a mass transfer of TEAP, among which China and the USA are the developing and developed countries with the largest amount of TEAP transfers, respectively. (2) The SPTEAP and EFS vary greatly among countries, and these values are generally higher in developed countries than in developing countries. The relationship between the three EFSs can be expressed as [Formula: see text] in all countries, thus indicating that improving the technological level of a country is the best solution for reducing the TEAP in that country while incurring the lowest cost and the least difficulty. (3) Over the long run, the increase in [Formula: see text] and [Formula: see text] reduces the SPTEAP. Conversely, an increase in [Formula: see text] increases the SPTEAP. Therefore, policymakers should weigh these three factors according to the fluctuation of the SPTEAP and constantly adjust the allocation structure and ratio of these factors to maximize the benefits of transboundary air pollution governance.

Household behavior and the rebound effect

This paper studies the rebound effect from a dynamic general equilibrium perspective, where how household’s decisions about consumption, investment and labor supply change in response to energy efficiency gains are crucial for assessing their effects on energy demand. The paper considers three types of energy efficiency gains: In the production of energy, in the energy consumed by households, and in the use of energy as an input by firms. A clear and significant rebound effect in the long-run is observed following an efficiency improvement in the production of energy, and in a lesser extent, in the case of the use of energy as an input in the final goods production sector. By contrast, in the case of the consumption of energy by households, the effect depends on the elasticity of substitution between energy services and the rest of goods. Finally, the paper also studies the dynamics of energy demand over the business cycle by considering stochastic energy efficiency shocks.

Estimation of the value-added/intermediate input substitution elasticities consistent with the GTAP data

Estimation of the value-added/intermediate input substitution elasticities consistent with the GTAP data

Energy transition and climate change abatement: A macroeconomic analysis

The paper integrates the characteristics of regenerative energies into a dynamic macroeconomic model with climate change. Learning and economies of scale in new energy moderate the cost of emissions reductions and increase the speed of decarbonization. I provide closed-form analytical solutions for the development of regenerative energies, emissions, consumption, and population. The elasticity of substitution between clean and dirty energy inputs, stringency of climate policy, and potential raw material scarcity constitute critical conditions for reaching carbon neutrality by 2050. I find that a timely carbon phase-out requires sufficient substitution in the energy sector, continued learning and scale effects in regenerative energies, and active climate policy, which is indispensable even with enormous cost degression of regenerative energies. Raw material scarcity induced by regenerative energy use slows down the transition but can be overcompensated by more stringent climate policy at a moderate economic cost.

Production network diversification and economic development

We provide empirical evidence and a theoretical analysis of the influence of production network diversification on countries' economic performance, reflected in their GDP per-capita levels. Using a panel sample of 55 countries, we find a strong positive association between the number of active links in the input-output network of a country and its GDP per-capita over time, even after controlling for several country characteristics. To complement and scrutinize our empirical finding, we advance economic theory on the link between network diversity and economic development by proposing a multisector model with input-output linkages, non-unitary elasticity of substitution in production, and a love of diversification in the bundle of intermediate inputs that rationalize our empirical results. In the long run, when labor and intermediates are substitute inputs, denser production structures enjoy higher productivity in the intermediate input bundle and also amplify positive shocks more strongly than less connected networks. Hence, our model predicts that economies with denser production structures display higher income.

Neoclassical production, scarcity of skills and Pareto distributions

The distribution of top earnings follows a “power-law”: the top tail of the distribution is thick relative to other distributions and is approximately Pareto-distributed. There are different mechanisms proposed in the literature that yield Pareto distributions and power-laws. This paper shows that a simple general equilibrium model where aggregate production is assumed of the constant-elasticity-of-substitution (CES) type over multiple labor inputs generates distributions in earnings and wages that follow power-laws. The finding is very general as the distribution of the skill-types is irrelevant for the shape parameter (the Pareto exponent) of the power-law. The model displays a tight relationship between the Pareto exponent and the elasticity of substitution between the labor inputs. Available empirical estimates of the elasticities of labor substitution and of the labor supply predict a Pareto exponent consistent with its empirical counterpart for the distribution of earnings in the US.

The race between education and technology in Chile and its impact on the skill premium

While studies using pre-2000 data for Chile implied that technological change drives the skill premium evolution, post-2000 data suggests that the supply of skilled labour expansion has reduced this premium. In contrast, literature shows a consistent link between technology and the growing demand for skilled labour, despite educational improvements, leading to skill premium increases. We examine these interactions under the race between education and technology model (RBET) for Chile between 1980 and 2018 considering the inconsistent findings (e.g., negative elasticities) reported by past studies. We also find inconsistencies using cointegration techniques. Alternatively, we apply an Unobserved Component Model using a Bayesian estimation that enforces the required economic and theoretical conditions. We find that, before the 2000s, the technological change dominated. However, in the 2000s, the demand was surpassed by educational supply increases, reducing the premium. The estimated elasticity of substitution between skilled and unskilled labour is 6.5, implying that both are more substitutable than commonly thought.

Interfuel Substitution and Inflation Dynamics in India

Abstract This paper uses neoclassical microeconomic theory to investigate the demand for energy and interfuel substitution in India at the sectoral level. It makes full use of the relevant economic theory and econometrics and generates inference in terms of Allen and Morishima elasticities of substitution that are internally consistent with the data and nonlinear models used. The results indicate that the interfuel substitution elasticities are consistently below unity in the household and power sectors, revealing the limited ability to substitute between major energy commodities in these two sectors. However, significant substitution relationships are found in the industrial and transportation sectors, suggesting that energy price changes in these sectors will significantly shift the demand for energy and consumption. Based on measured elasticities of substitution, we also discuss implications of energy price shocks on inflation and inflation targeting strategies by the central bank.

Study of the Spatio-Temporal Variation of Agricultural Sustainability at National and Provincial Levels in China

As an important pillar of human civilization, the development of agriculture has gradually become the focus of the international community to solve the development dilemma and promote the implementation of the global Sustainable Development Goals (SDGs). Agricultural sustainability issues are widely addressed in scientific literature and various reports by international organizations. However, there are some problems in the existing studies, such as the design of agricultural sustainable development evaluation indicators does not consider the differences in development stages and data statistical capacity of various countries, and the research depth of spatial and temporal change of agricultural sustainable development is insufficient. Agriculture has become a bottleneck for the world and China to achieve the SDGs. Based on the global indicator framework of the Sustainable Development Goals and comprehensive consideration of agricultural development common problems and regional characteristics, this work has established a basic index library consisting of 86 indicators to evaluate the agricultural sustainable development in China and provide the basis for the assessment in different regions. In the indicator optimization process, having considered the development stage of China, the basic characteristics of agriculture, data availability, and reliability, we determined an evaluation index system of China’s agricultural sustainable development that includes 25 specific indicators. The constant elasticity of substitution (CES) model was used to assess the temporal and spatial changes in agricultural sustainability in China at the national, regional, and provincial levels. The results showed that China’s Agricultural Sustainable Development Index (ASDI) score increased from 44.76 in 2011 to 59.22 in 2021, and the ASDI scores of all agricultural regions and provinces also increased to varying degrees. In terms of goal scores, SDG2, SDG6, SDG7, SDG8, SDG9, and SDG12 all exhibited an overall upward trend, in which SDG6 performed the best, and SDG2 performed the worst, scoring 84.76 and 43.05 in 2021, respectively. This paper will provide a basis for systematically evaluating the progress of agricultural sustainable development goals and accurately identifying unsustainable problems in agricultural development to help China implement the 2030 Agenda for Sustainable Development.

Secular stagnation: a Classical–Marxian view

We study a model of secular stagnation, income and wealth distribution, and employment in the Classical–Marxian (CM) tradition, with the purpose of drawing a contrast with established Neoclassical accounts of the topic (Piketty 2014, Gordon 2015). In these explanations, which assume full employment of labor at all times, an exogenous reduction in the growth rate g increases the difference with the endogenous rate of return to capital r. The capital–income ratio rises and, if the elasticity of substitution is above one, the wage share falls. Our explanation does not presuppose full employment, and features a crucial tension between profit-driven capital accumulation and wage-driven labor-augmenting technical change: both these features are defining for CM economics and have been emphasized in recent heterodox macro literature. Institutional or technological shocks that lower the wage share initially foster capital accumulation – which is profit-driven – and increase wealth inequality. However, the effect on long-run growth is negative, because a reduction in the wage share lessens the incentives by firms to introduce labor-saving innovation, which is wage-driven. The capital–income ratio must rise in order to restore balanced growth and stabilize employment in the long run; and the increase in wealth inequality is permanent. The ultimate effect on long-run employment depends on the relative strength of the response of technical change versus real wage growth to labor market institutions: we identify a simple condition that delivers either a wage-led or a profit-led long-run employment regime. We then test the model using time-series data for the US (1960–2019): impulse responses from vector error-correction model (VECM) estimators lend support to the main predictions of our model, and point to the employment–population ratio being wage-led.

Environmental regulation stringency and allocation between R&D and physical capital: A two-engine growth model

Many studies have identified the negative effect of environmental regulation on capital accumulation and the positive effect on innovation, but this observed capital-innovation tradeoff due to environmental regulation lacks theoretical underpinning. We fill this gap by developing a unified two-engine endogenous growth model with environmental regulation, and show that a stringent environmental policy (in terms of pollution tax) leads to a sectoral reallocation from dirty inputs to clean final-good sectors, which increases the demand for R&D and activates the innovation engine. The capital engine depends on the elasticity of substitution between polluting and capital inputs. If both are sufficiently complementary, capital accumulation slows down. Another novelty of our model is that the contrasting responses of the two growth engines can lead to an inverted-U relation between overall GDP growth and environmental taxation. Our calibration shows that a well-designed environmental regulation can achieve a “double dividend”: both improving the environment and enhancing economic growth and social welfare. Our empirical analysis provides macro-level evidence to justify our model prediction by using cross-country panel data.

Path mechanism and spatial spillover effect of green technology innovation on agricultural CO2 emission intensity: A case study in Jiangsu Province, China

Green technology innovation (GTI) is one of the most important factors influencing agricultural carbon emission intensity (ACEI). Various studies have explored the impact of GTI on ACEI, but the path mechanism has not been fully explained. This study incorporates GTI and ACEI into the constant elasticity of substitution (CES) production function and constructs a theoretical model to analyse their direct impact mechanisms. Drawing on the substitution effect theory and the Marshall–Arrow–Romer (MAR) externalities theory, this study introduces two regulatory mechanisms: optimization of energy structure and agricultural industry agglomeration (AIG). Additionally, it explores the pathway mechanisms under the influence of spatial spillover effects based on Tobler’s first law of geography. Then, taking Jiangsu Province in China as a case study, empirical tests are conducted using LSDVC and dynamic spatial SAR models. The results are as follows. (1) GTI effectively inhibits ACEI directly, and has significantly positive spatial spillover effects on ACEI reduction in the short and long terms. (2) Energy structure optimization positively regulates the effect of GTI on ACEI reduction, and energy structure optimization in nearby cities may help GTI restrain ACEI in the local city in the short term. (3) AIG has a positive regulating effect on GTI reducing ACEI, and the moderating effect of AIG has positive spillover effects in the short term. (4) When both regulatory pathways are employed simultaneously, the moderating effect of AIG in local or neighbouring areas is expected to become ineffective. These findings are useful for solving the problem of ACEI reduction by managing the transfer and distribution of GTI between different regions, considering spatial spillover and moderating effects.

FDI and the Evolution of Directed Technological Progress Bias: New Evidence from Korean Outward Investment

Purpose - Southeast Asia has been the focus of Korea's foreign investment. Korea has been helping developing countries in Southeast Asia achieve economic growth and win-win cooperation through capital exports. FDI is an important channel for technology diffusion. However, the impact of FDI on the bias of technological progress in the host country is dependent on the host country's own endowment structure and capital-labor factor substitution elasticity. Therefore, the central issue of this paper is to accurately evaluate the impact of Korea's FDI to the four Southeast Asian countries in various industries on their bias of technological progress.
 Design/methodology - The paper uses macroeconomic data for Korea and four East Asian countries to estimate capital-labor factor elasticities of substitution using nonlinear, seemingly uncorrelated regressions (NLSUR). Then, the biased technological change index (BTCI) is calculated for each country. Finally, panel data analysis is used to explore the impact of Korean FDI in various industries in the four Southeast Asian countries on their own directed technological progress, and a robustness test is conducted.
 Findings - There is a substitution relationship between capital and labor factors based on their elasticity in Korea, Singapore and the Philippines. There is a complementary relationship between capital and labor factors in Indonesia and Malaysia. According to the BTCI, there is a trend toward labor-biased technological progress in all countries. Korean investments in manufacturing, wholesale and retail trade in the host country trigger capital-biased technological change in the host country; investments in the finance, insurance and information and communication sectors trigger labor- biased technological change. In addition, this paper also confirms that directed technological progress can enable cross-country transmission.
 Originality/value - The innovation of this paper lies in three aspects. First, we estimate the BTCI for five countries and explore the trend and situation of directed technological progress in each country from each country's own perspective. Second, we explore the impact of Korean FDI in the host country on the bias to its technological progress at the industry level. Second, we explore the impact of Korean FDI in various industries in the four Southeast Asian countries on the four countries' own directed technological progress from a national perspective. Finally, we propose corresponding countermea- sures for technological progress from the perspective of inverse factor endowment. These innovative points not only expand the understanding of technological progress and cross-country technology transfer in East Asia but also provide practical references for policy-makers and business operators.

Intermediate Goods–Skill Complementarity

Abstract Recent research has begun to imply intermediate goods–skill complementarity; however, this possible complementarity has been hypothesized but not statistically tested, despite the increasing importance of intermediate goods in production. This study provides statistical evidence regarding whether intermediate goods are more complementary with skilled labor than with unskilled labor. Using panel data from 40 countries over the period 1995–2009, we estimate a two-level constant elasticity of substitution (CES) production function. Our major findings are fivefold. First, at the aggregated one-sector level, the elasticity of substitution between intermediate goods and unskilled labor is 1.22, which is significantly greater than that between intermediate goods and skilled labor of 1.05, indicating intermediate goods–skill complementarity. Second, at the disaggregated level, such complementarity is primarily observed in heavy manufacturing industries and the service sector, whereas complementarity is observed between intermediate goods and unskilled labor in the primary sector and light manufacturing industries. Third, the normalization of the data and the cumulant estimators exhibit stronger results. Fourth, our baseline results are confirmed applying several robustness checks, such as switching skilled and unskilled labor or considering capital–skill complementarity. Finally, intermediate goods–skill complementarity tends to be higher for industries that use more imported intermediate goods.

Is it the same to invest in health care or social care? A health production function study

Abstract Background This study aims to explore the relationship between health expenditure and social expenditure in their role in affecting health outcomes, such as death rates and disability-adjusted life years. Both types of spending may behave as complementary or supplementary goods, besides, they may interact with each other over time. Methods We used a translog production function using both health and social expenditures as inputs, for a panel of 27 years and EU countries, in order to estimate their respective output elasticities and the elasticity of substitution between them. Instrumental variables and ridge regressions were used to estimate unbiased elasticities. Results Our results point out that the elasticity of substitution between social and health expenditures is positive and less than one, which means that these spending variables may be classified as weak substitutes. Still, the substitutability pattern is heterogeneous according to each country, year and health outcome, being most sensitive to mortality rates in comparison with disability-adjusted life years. Conclusions Our Results support the hypothesis of a weak substitution relation between health and social expenditure. This implies that investments in the health sector should not be independent of social sector investments. Thus, policymakers need to consider the joint effect of these two spending categories when considering investment decisions aiming at achieving specific health gains. This presentation was supported by National Funds through FCT - Fundação para a Ciência e a Tecnologia,I.P., within CINTESIS, R&D Unit (reference UIDB/4255/2020) Key messages • As health and social expenditures behave as weak substitutes, they have a complex relationship that depends on time, technology and the type of health benefit. • Both types of spending may affect health outcomes, still, their effect is heterogenous and may be cummulative with time.

Directions for Improving the Activities of Regional banks in the Republic of Tatarstan

The purpose of this study is to develop tools for assessing the state of regional banks and to justify decisions on the allocation of resources between their business areas by adapting existing methods of banking management to the new economic environment.The authors apply both general scientific methods (induction, deduction, analysis, synthesis) and special methods: systematic and retrospective analysis of existing developments in bank decisions.The results of the application of these methods are the mathematical models describing the functioning of the credit-deposit and transaction of commercial banks of Tatarstan in the past three years from the point of elasticity of actives and liabilities’ substitution. In the paper, we systematized the indicators of actives and liabilities of the five largest commercial banks in Tatarstan in 2019–2022, we approved the equations that characterize these actives and liabilities’ substitution elasticity in MS Excel.The conclusion is that in most cases, there is a unitary elasticity of their mutual substitution, which leads to the conclusion that the Tatarstan banking system is currently in the growth stage of a new life cycle, which began in 2014, after the Russian economy entered new realities due to sanctions pressure. The recommendations were formulated for the banks of Tatarstan in terms of improving the quality of loan portfolios in new conditions: they should improve the methods of making decisions about the loans for companies’ business activities which are first created.

On government spending and income inequality under monopolistic competition

AbstractThis paper systematically examines the theoretical and quantitative interrelations between government spending and disposable income inequality in a tractable monopolistically competitive Ramsey macroeconomy. Upon an increase in government size, we analytically show that whether the long-run after-tax Gini coefficient rises or falls depends on the sign and magnitude of the wealth/capital inequality effect versus those of the adjusted-labor effect. Under (i) a mild level of productive public expenditure externalities and (ii) a sufficiently high intertemporal elasticity of consumption substitution, our calibrated model is able to generate qualitatively as well as quantitatively consistent income inequality effects of government spending vis-à-vis recent estimation results.

Estimating the effects of demographics on interest rates: A robust Bayesian perspective

We highlight a reason for the vast range of estimates for the effect of demographics on interest rates: the magnitudes are not well-identified without often omitted data on capital and life-cycle consumption. Using nonparametric prior sensitivity analysis for an overlapping generations model estimated through Bayesian methods, we show small changes in the prior for the discount rate, intertemporal elasticity of substitution, and depreciation rate can shift posterior quantiles for the effects of demographics by up to 1.5 percentage points. Capital-output ratio data substantially tighten estimates of the depreciation rate but not the discount rate. Life-cycle consumption is especially informative about the intertemporal elasticity of substitution.

Intertemporal substitution in labor supply: A meta-analysis

The intertemporal substitution (Frisch) elasticity of labor supply governs how structural models predict changes in people's willingness to work in response to changes in economic conditions or government fiscal policy. We show that the mean reported estimates of the elasticity are exaggerated due to publication bias. For both the intensive and extensive margins the literature provides over 700 estimates, with a mean of 0.5 in both cases. Correcting for publication bias and emphasizing quasi-experimental evidence reduces the mean intensive margin elasticity to 0.2 and renders the extensive margin elasticity tiny. A total hours elasticity of about 0.25 is the most consistent with empirical evidence. To trace the differences in reported elasticities to differences in estimation context, we collect 23 variables reflecting study design and employ Bayesian and frequentist model averaging to address model uncertainty. On both margins the elasticity is systematically larger for women and workers near retirement, but not enough to support a total hours elasticity above 0.5.