Generalized Leontief Research Articles

Price elasticities of retail energy demands in the United States: New evidence from a panel of monthly data for 2001–2016

Price elasticities play an important role in energy demand forecasting, which in turn shapes energy policy and investment decisions. However, there is still considerable debate around how responsive customers are to energy prices, and whether investments in metering and consumer education have made them more responsive in recent decades. Using a Generalized Leontief (GL) demand system and a rich panel of monthly data covering 2001–2016 for the lower 48 United States, we estimate own- and cross-price elasticities of retail demand for electricity, natural gas and fuel oil for the three major customer classes: residential, commercial and industrial. These estimates indicate that retail energy demand in the United States was highly price-inelastic over 2001–2016, consistent with historical and current estimates used by many utility planners. Our findings suggest that, with current technologies and behavior, higher energy prices will not induce significant reductions in demand. Hence, energy efficiency standards and utility demand-side programs are still an important strategy for managing energy demand growth, mitigating energy price risk, and reducing the environmental impacts associated with energy use. Finally, while our analysis uses data from the United States, our approach is general and can be readily extended to other countries that have similar data available.

Energy Price Elasticity of Energy Intensity for Canadian Manufacturing Industries

This study analyses the roles that energy and other input prices play in reducing energy intensity of each of the 21 (according to the 4-digit code NAICS) manufacturing industries in Canada. A system of Generalized Leontief (GL) cost function and the derived factor intensity equations are estimated using the iterative seemingly unrelated regression (ISUR) and system generalized method of moments (GMM) estimation methods. Based on the GMM results, I find average energy price elasticity of -0.34 for the overall sector. Capital is complementary with energy in most cases while labour and energy are substitutes in about 50 % of the cases. Material and services inputs are mostly substitutable with energy. Technological change is energy-using in many industries. The policy implication is that a policy-induced permanent increase in energy costs may not contribute much to energy efficiency improvements in the manufacturing industries. Promoting investments in energy-saving technical change should be considered particularly for those industries exhibiting energy-using technological changes.

Response of industrial customers to hourly pricing in Ontario’s deregulated electricity market

This paper uses hourly data from Ontario (Canada) between 2005 and 2008 to estimate the effects of real time wholesale electricity prices on demand by industrial customers. Nonlinear SUR estimates from Generalized Leontief (GL) specifications reveal elasticities of substitution from 0.02 to 0.07, confirming that industrial customers (connected to the transmission grid) shift consumption across peak and off-peak periods in order to reap benefits of lower prices. Estimates from FGLS and IV models suggest that this reduction in demand by industrial customers results in lower wholesale prices, which benefits all consumers. The policy lesson is that market based schemes that encourage Real Time Pricing (RTP) pricing should result in positive spillovers to all consumers.

Poor but allocatively efficient—evidence from the Eastern Amazon

AbstractThis research empirically investigates the well‐known “poor‐but‐efficient” hypothesis formulated by Schultz (1964) assuming that small‐scale farmers in developing countries are reasonably efficient in allocating their scarce resources by responding positively to price incentives. Deviating from Schultz it is assumed here that scale effects explain a considerable proportion of small‐scale farmers' relative efficiency. The theoretical underpinnings of the scale efficiency concept are briefly reviewed before a normalized generalized Leontief (GL) profit function is modeled by using its output supply and input demand system to capture the joint production of cassava flour and maize by a sample of small‐scale farmers in the Bragantina region of the Eastern Amazon, Brazil. The discussion of theoretical consistency and functional flexibility is considered by imposing convexity on the GL profit framework. The empirical results confirm our revised hypothesis that small farmers in traditional development settings are “poor‐but‐allocatively efficient” by clearly suggesting considerable inefficiency with respect to the scale of operations.

Short cuts to dynamic factor demand modelling

By means of so-called virtual or shadow prices, short-run factor demands, short-run marginal costs, etc. can be derived from any long-run cost function. The traditional approach (short-run/restricted/conditional/variable cost functions) is criticized, and it is also shown that technological change, scale effects, etc. can be added to any cost function by means of disembodied factor-augmenting efficiency indexes, easing the interpretations of the effects, but without loss of flexibility. It is shown that the trend- and scale-parameters of the (long-run) translog cost function can be directly translated into trend- and scale-parameters of such efficiency indexes. The techniques are illustrated on the well-known Berndt–Wood data set, using a (Diewert) long-run generalized Leontief (GL) cost function, and assuming that capital and labour are quasi-fixed.

Choice of Functional Form for Agricultural Production Analysis

Economic theory is useful in many aspects of model specification, such as identifying relevant variables for a supply equation or suggesting homogeneity restrictions, curvature requirements, or symmetry restrictions across equations. Theory is seldom sufficient, though, to determine functional form, either a hypothesized true form or a reasonable approximation. Because the validity of statistical tests and inferences are conditional on model specification, the functional form should be appropriate for the specific research use or hypotheses to be tested, capture applicable theoretical concerns, and also allow the data to speak. In addition to theoretical considerations, empirical priors (e.g., knowledge about the technology or industry characteristics) and/or model pretesting are often considered by the analyst in choosing a functional form. The choice of functional form is not a trivial matter. Empirical estimates, including own-price elasticities, elasticities of substitution, returns to scale, and model specification test conclusions are often sensitive to choice of functional form (i.e., Berndt and Khaled; Chalfant; Swamy and Binswanger; Shumway and Lim). Perhaps of greatest importance is the fact that predicted responses of policy analyses using an inferior functional form may be biased and inaccurate, thus posing serious problems for policy impact analysis. Identifying suitable functional forms before estimating parameters of concern is clearly important. The most frequently used functional forms in production (and consumption) analyses are second-order Taylor-series expansions, also termed locally or just flexible functional forms.' These forms have a sufficient number of parameters to represent comparative statics at a point without imposing any restrictions across effects (Fuss, McFadden, and Mundlak). Three flexible functional forms dominate the recent empirical production economics literature translog, generalized Leontief, and quadratic. An examination of the 113 published articles cited by Fox and Kivanda and Shumway that estimated static dual models of agricultural production between 1972 and 1993 revealed that one-half used the translog (TL) functional form, one-fourth used the normalized quadratic (NQ), one-eighth used the generalized Leontief (GL), and one-eighth used a variety of other functional forms. Empirical priors for specifying functional form for an agricultural production model are often limited, both because of the small number of functional form tests conducted and because of differences in findings among them. For example, using different data sets for U.S. agriculture, Gottret failed to reject any of these three functional forms for a restricted profit function, Ornelas, Shumway, and Ozuna failed to reject only the NQ for a restricted profit function, and Chalfant rejected both functional David P. Anderson is an Agricultural Economist, Livestock Marketing Information Center; Andrew Tan Khee Guan is a lecturer, Universiti Sains Malaysia; and the remaining authors are, respectively, Research Assistant, Graduate Student, Research Assistant, and Professor of Agricultural Economics, Texas A&M University. The authors are listed alphabetically. Senior authorship is shared equally. The constructive comments of anonymous RAE reviewers on earlier drafts of this manuscript are gratefully acknowledged. The manuscript reports research conducted by the Texas Agricultural Experiment Station, Texas A&M University System. 'They can be expansions of a monotonic transformation of the underlying function, not necessarily of the function itself.

A Nonhomothetic Generalized Leontief Cost Function Based on Pooled Data

Factor demand studies of Komiya, Ozaki, Lau and Tamura based upon detailed cross-section data on individual production units have found that the nonhomothetic factor limitational ( NHT-FL) demand system, a nonhomothetic version of the Leontief fixed coefficient model, well explains the data. These results, however, have mostly been ignored in the current literature on flexible functional forms, and in fact none of the well-known nonhomothetic flexible cost function forms includes the NHT-FL model. I introduce a new nonhomothetic form of the Generalized Leontief (GL) cost function, which includes the NHT-FL model as a special case. Empirical application to a pooled data set of the Japanese iron & steel industry indicates that his form is superior to the translog, Diewert-Wales GL, and Berndt-Khaled GL forms. Copyright 1990 by MIT Press.

Nonrobustness of Dynamic Dual Models of the Northeastern and U.S. Dairy Industries

The robustness of dynamic dual models examined by Howard and Shumway is reevaluated with the proper specification for the modified generalized Leontief (GL) and normalized quadratic (NQ) functional forms. In an application to the Northeastern and U.S. dairy industries, the theoretical properties, adjustment rates, and predictive ability were similar under both functional forms. However, elasticity measures differed significantly.

Nonrobustness of Dynamic Dual Models of the U.S. Dairy Industry

The robustness of dynamic dual model results across functional forms is examined for the U.S. dairy industry. Modified generalized Leontief (GL) and normalized quadratic (NQ) functional forms are compared by examining their consistency with properties of the competitive firm, estimated rates of adjustment for cows and labor, tests of technological change, and elasticities. Homogeneity and symmetry are maintained in both models. Convexity is not rejected by the GL and is not seriously violated by the NQ. Absence of technological change is rejected by both models, but quality indexes on labor and cows fully embody technological change occurring within labor and cows in the NQ but not in the GL. Policy-relevant elasticities differ greatly between the functional forms. Dynamic dual models are found to be non-robust in important ways to choice of functional form.

The Global Properties of the Minflex Laurent, Generalized Leontief, and Translog Flexible Functional Forms

The Global Properties of the Minflex Laurent, Generalized Leontief, and Translog Flexible Functional Forms