Estimate Substitution Elasticities Research Articles

Nonsubstitutable Consumption Growth Risk

Standard applications of the consumption-based asset pricing model assume that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurables. As a consequence, energy consumption affects the pricing function as a separate factor. Variation in energy consumption betas explains a large part of the premia related to value, investment, and operating profitability. For example, value stocks are typically more energy intensive than growth stocks and thus riskier, because they suffer more from the oil supply shocks that also affect households. This paper was accepted by Lukas Schmid, finance. Funding: C. Schlag gratefully acknowledges research and financial support from the Leibniz Institute for Financial Research SAFE. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.01269 .

On estimating Armington elasticities for Japan's meat imports

AbstractBy fully accounting for the distinct tariff regimes levied on imported meat, we estimate substitution elasticities of Japan's two‐stage import aggregation functions for beef, chicken and pork. Although the regression analysis crucially depends on the price that consumers face, the post‐tariff price of imported meat depends not only on ad valorem duties but also on tariff rate quotas and gate price system regimes. The effective tariff rate is consequently evaluated by utilising monthly transaction data. To address potential endogeneity problems, we apply exchange rates that we believe to be independent of the demand shocks for imported meat. The panel nature of the data allows us to retrieve the first‐stage aggregates via time dummy variables, free of demand shocks, to be used as part of the explanatory variable and as an instrument in the second‐stage regression.

The Variable Elasticity of Substitution Function and Endogenous Growth: An Empirical Evidence from Vietnam

Purpose: To specify a Variable Elasticity of Substitution function (VES), in which the estimated Elasticity of Substitution (ES) can give some implications for the tendency of economic growth in the Vietnames manufacturing sector. Design/Methodology/Approach: The contribution and the relevant methodology is based on the Bayesian approach having some advantages over the frequentist method: (i) the simulation and prediction results are more reliable in Bayesian analysis due to combining prior knowledge about parameters with obverved data to compose a posterior model, whereas the frequentist approach is based only on available data; (ii) in probability sense, Bayesian credible intervals have a straightforward interpretation compared to frequentist confidence intervals. The Bayesian nonlinear regresion performed is suitable for fitting production functions and depicting economic growth. Findings: The specified VES function has the ES greater than one and this finding contradicts many previous empirical studies in the growth theory. This result points to the possibility of unbounded endogenous growth in the Vietnamese manufacturing sector. Practical implications: Based on the empirical results, in order to realize the possibility of endogenous growth for the studied Vietnamese manufacturing sector, policies of enforcing investment are needed. To raise the level of science and technique, as well as human capital of the Vietnamese enterprises, at the same time, there is great necessity to encourage R&D activities in both the private and public sectors. Originality/Value: Although this study organically builds upon recent studies about the link between the VES, the elasticity of factor subsitution and economic growth, its results proved that the VES is more appropriate than the Cobb-Douglas and the Constant Elasticity of Substitution (CES) to explain economic growth in the view of capital-labor relationship.

Fuel is Pumping Premiums: A Consumption-Based Explanation of the Value Anomaly

Standard applications of the consumption-based asset pricing model make the assumption that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurable goods or services. As a consequence, energy consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in energy consumption betas explains a large part of the value premium. Value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the oil supply shocks that also affect households.

Capital-labour-energy substitution in a nested CES framework: A replication and update of Kemfert (1998)

The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: Kemfert (1998) (‘Estimated substitution elasticities of a nested CES production function approach for Germany’, Energy Economics, 20, 249–264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in Kemfert (1998). We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.

SUBSTITUTION ELASTICITIES IN A CONSTANT ELASTICITY OF SUBSTITUTION FRAMEWORK – EMPIRICAL ESTIMATES USING NONLINEAR LEAST SQUARES

Elasticities are key parameters for any economic analysis. Using the World-Input–Output Database, we estimate substitution elasticities for a three-level nested constant elasticity of substitution KLEM production structure using up to date nonlinear least squares estimation procedures. This allows us for the first time to use one coherent data set for the estimation process. Furthermore, it gives us the opportunity to derive elasticities from the same data which researchers can use to calibrate their models. On the basis of our estimations, we demonstrate that the practice of using Cobb–Douglas or Leontief production functions in economic models must be rejected for the majority of sectors. We provide a comprehensive set of estimated substitution elasticities covering a wide range of sectors. Our results suggest that no substantial change in input substitutability takes place during the time period we consider. Moreover, there is no substantial variation in substitution elasticities across regions.

Temporary Employment, Job Flows and Productivity: A Tale of Two Reforms

We investigate the effects of two reforms of temporary employment using panel data on Italian firms. We exploit variation in their implementation across regions and sectors for identification. Our results show that the reform of apprenticeship contracts increased job turnover and induced the substitution of external staff with firms’ apprentices, with an overall productivity-enhancing effect. The reform of fixed-term contracts instead did not produce the intended results: it induced a substitution of temporary employees in favour of external staff and reduced capital intensity, generating productivity losses. We estimate substitution elasticities across various types of temporary contracts that are consistent with this interpretation.

Substitution Elasticities in a CES Production Framework - An Empirical Analysis on the Basis of Non-Linear Least Squares Estimations

Effectiveness, cost-efficiency and distribution issues are crucial for any form of future regulation. This results in the need for reliable instruments to assess regulations ex ante. Elasticities are key parameters for such instruments. We consistently estimate substitution elasticities for a three level nested CES KLEM production structure on the basis of non-linear least squares estimation procedures. Thereby we take advantage of the new World-Input-Output Database. This allows us for the first time to use one consistent dataset for the estimation process and gives us the opportunity to derive elasticities from the same data which researchers can use to calibrate their simulations. Our results show that compared to standard linear estimations using Kmenta approximations, non-linear estimation techniques perform significantly better. Moreover, during the time period we consider, no significant change in input substitutability takes place over time. Furthermore, we demonstrate that the common practice of using Cobb-Douglas or Leontief production functions in economic models must be rejected for the majority of sectors. In response to this result, we provide a comprehensive set of consistently estimated substitution elasticities covering 35 sectors.

Temporary Employment, Job Flows and Productivity: A Tale of Two Reforms

We investigate the effects of two reforms of temporary employment using panel data on Italian firms. We exploit variation in their implementation across regions and sectors for identification. Our results show that the reform of apprenticeship contracts increased job turnover and induced the substitution of external staff with firms' apprentices, with an overall productivity-enhancing effect. The reform of fixed-term contracts instead did not produce the intended results: it induced a substitution of temporary employees in favour of external staff and reduced capital intensity, generating productivity losses. We estimate substitution elasticities across various types of temporary contracts that are consistent with this interpretation.

A Semi-Nonparametric Approach to the Demand for Money in Pakistan

The degree of substitutability of different monetary assets serves as a valuable source of information for Pakistan’s monetary authorities in the context of money demand analysis. Barnett’s (1980) concept of the micro-foundations of money demand has paved the way for a more comprehensive demand system analysis. Locally flexible functional forms are unable to estimate substitution elasticities at all data points, and thus, we use the asymptotically ideal model, which is a semi-nonparametric globally flexible functional form. Our data on income, price, and substitution elasticities show that there is less-than-perfect substitution among monetary assets. The results of Allan and Morishima elasticities show that the former are inherently biased toward showing monetary assets as complements, making Morishima a better choice. The study recommends that it is high time Pakistan’s monetary authorities abandoned the simple-sum aggregation method, which assumes perfect substitution among monetary assets.

The Empirical Assessment of Technology Differences: Comparing the Comparable

This paper compares technologies across space and time on the basis of factual and counterfactual substitution elasticities and argues that differences in estimated substitution elasticities should be decomposed into two counterfactual components. While the first component is designed to indicate how the ease of substitution is altered by varied economic circumstances, the second addresses the question of how technologies would compare under genuinely comparable situations. This argument is illustrated by the example of energy-price elasticities of capital before and after the oil crisis of the early 1970s.

The Empirical Assessment of Technology Differences: Comparing the Comparable

This paper compares technologies across space and time on the basis of factual and counterfactual substitution elasticities and argues that differences in estimated substitution elasticities should be decomposed into two counterfactual components. While the first component is designed to indicate how the ease of substitution is altered by varied economic circumstances, the second addresses the question of how technologies would compare under genuinely comparable situations. This argument is illustrated by the example of energy-price elasticities of capital before and after the oil crisis of the early 1970s.

Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution

Abstract I present new estimates of the elasticity of substitution between capital and labor using data from the private sector of the U.S. economy for the period 1948-1998. I first adopt Berndt's (1976) specification, which assumes that technological change is Hicks neutral. Consistently with his results, I estimate elasticities of substitution that are not significantly different from one. I next show, however, that restricting the analysis to Hicks-neutral technological change necessarily biases the estimates of the elasticity towards one. When I modify the econometric specification to allow for biased technical change, I obtain significantly lower estimates of the elasticity of substitution. I conclude that the U.S. economy is not well described by a Cobb-Douglas aggregate production function. I present estimates based on both classical regression analysis and time series analysis. In the process, I deal with issues related to the nonsphericality of the disturbances, the endogeneity of the regressors, and the nonstationarity of the series involved in the estimation.

An estimation of US industry-level capital–labor substitution elasticities: support for Cobb–Douglas

A key parameter that determines the distributional impacts of a policy shift in general equilibrium models is the elasticity of substitution between capital and labor. Despite the importance of this parameter in applied modeling, its identification continues to pose a challenge. Given the structure of most growth models, we posit that the true relationship between capital and labor is likely to be close to Cobb–Douglas. Using a rich new data set from the Bureau of Economic Analysis (BEA), we estimate substitution elasticities for 28 industries that cover the entire economy, and provide an indication of the long- and short-run ranges of those estimates. We fail to reject the Cobb–Douglas specification in 20 of the 28 industries. These findings lend support to the Cobb–Douglas specification as a transparent starting point in simulation analysis.

The Empirical Assessment of Technology Differences: Comparing the Comparable

This paper compares technologies across space and time on the basis of factual and counterfactual substitution elasticities and argues that differences in estimated substitution elasticities should be decomposed into two counterfactual components. While the first component is designed to indicate how the ease of substitution is altered by varied economic circumstances, the second addresses the question of how technologies would compare under genuinely comparable situations. This argument is illustrated by the example of energy-price elasticities of capital before and after the oil crisis of the early 1970s.

An Estimation of Industry-Level Capital-Labor Substitution Elasticities for U.S. Production: An Argument for Cobb-Douglas

A key parameter that determines the distributional impacts of a policy shift in general equilibrium simulations is the elasticity of substitution between capital and labor. Using a rich new data set by the Bureau of Economic Analysis, we estimate substitution elasticities for 28 industries and provide an indication of the long- and short-run estimates. Given the structure of most growth models, we posit that the relationship between capital and labor is likely to be close to Cobb-Douglas. Our findings lend support to the Cobb-Douglas specification as a transparent starting point in simulation analysis.

ARE “RISKY ASSETS” SUBSTITUTES FOR “MONETARY ASSETS”?

The paper uses an asymptotically ideal model to estimate substitution elasticities between financial assets held by the U.K. personal sector. An important innovation is to extend the range of assets to include “risky” assets as well as capital certain “monetary” assets. The most significant result is the evidence of substitution between “risky” assets and “cash” assets. Also, as risk aversion increases substitution between “risky” assets and “cash” assets generally falls. (JEL E41)

Estimated substitution elasticities of a nested CES production function approach for Germany

This paper demonstrates an econometric estimation of substitution elasticities of a nested constant elasticity of substitution production function (CES) between capital, energy and labour for the West German industry. In the last few years CES production functions have become more important in economic modelling, especially for applied general equilibrium models where CES production functions are an important building stone. In the literature, different results of estimated elasticities can be found. This paper investigates three different approaches for nested CES production functions and their estimated substitution elasticities. Capital, energy and labour are estimated as substitutes for the West German industry in the long run.

Semi-nonparametric estimates of substitution elasticities

This paper uses semi-nonparametric and Diewert-flexible forms to estimate substitution elasticities between capital and labor. Results show that capital and labor are substitutes. Estimated elasticities from semi-nonparametric forms vary more over time than those from Diewert-flexible forms.

Monetary asset quality and substitutability

This paper utilizes a user-cost-dependent direct utility function to estimate elasticities of substitution (ES) between monetary assets. Unlike other ES studies, the generalized Fechner-Thurstone (GFT) utility function employed incorporates changes in monetary asset quality. The ES results show low substitutability between assets. These estimates have important implications for simple summation in forming monetary aggregates and for policy transmission through the liabilities issued by financial intermediaries.