High Elasticity Of Substitution Research Articles

Evidence on an endogenous growth model with public R&D

ABSTRACT The empirical investigation of properties of an endogenous growth model by Huang, Lai, and Peretto ([2023]. “Public R&D, Private R&D and Growth: A Schumpeterian Approach.” public.econ.duke.edu mimeo) in this paper confirms important assumptions and results of the model for OECD countries. Labour-augmenting technical change is enhanced through private and public R&D stocks in fully modified and dynamic OLS mean-group and pooled mean-group estimations, also when adding the number of enterprises. The CES spillover functions in the growth model’s functions for R&D stock dynamics are supported through nonlinear estimation under the assumptions of identical or different spillover parameters for private and public R&D. We suggest strong public-to-private spillovers and weak private-to-public spillovers as well as high elasticities of substitution for private–public R&D stocks for private R&D processes and low CES for public R&D processes. We confirm the existence of private–public researcher interaction effects in the private R&D knowledge growth function and provide tentative evidence for the linear model relation between public researchers and firm-level R&D and the hump-shaped relation between public and private researchers (both as % labour force). A vector-autoregressive (VAR) panel model in growth rates produces results, which are in accordance with the impact of public R&D cuts on the steady state and the transitional dynamics of the HLP model.

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)

World prices and business cycles in a small open input–output economy

The role of terms-of-trade shocks in driving economic fluctuations is revisited through a multisector small open economy model, where the various types of goods can all be consumed and employed as inputs. Under this assumption, we show that, unlike conventional wisdom, terms-of-trade shocks may not necessarily trigger an economic boom for the exporting country if its export goods are intensively employed or consumed domestically, with limited scope for substitution. We calibrate and estimate the proposed model using data from 15 emerging countries and find that it performs better than the standard model to explain the different impacts of terms-of-trade shocks across countries documented by Schmitt-Groh and Uribe (2018). Such results make the model an excellent new framework to extend the analysis of monetary policies and the effects of price changes. • This study uses a multisector SOE model with a realistic input–output structure. • Common models overestimate terms-of-trade shocks’ impacts in emerging countries. • Using export goods dampens the expansionary effects of terms-of-trade shocks. • High elasticity of substitution between goods neutralizes the dampening effects. • The model extends the analysis of the price change effects.

Responses of exporters to trade protectionism: Inferences from the US-China trade war

This paper investigates how exports respond to trade protection by studying the US-China trade war in 2018. Using monthly customs data in China from January 2017 to May 2019, we find that the launch of the trade war against Chinese exports by the US on average reduces Chinese total exports to the US by 16.47%. Further decomposition shows that the reduction in exports is mostly explained by a decrease in quantity, with prices relatively unchanged. Meanwhile, negative trade shocks cause export diversion to countries that are closer and have larger economies, and exports in R&D-intensive, skilled-labor-intensive, high-capital-income-share, and upstream industries have been diverted even more. Heterogeneous analyses show that industries with a comparative advantage, high export growth, large export value, and high elasticity of substitution are more responsive to trade protection.

Elasticity of substitution between public and private capital: Evidence from manufacturing firms in Europe

Most macroeconomic models either assume that public and private capital are perfectly substitutable in the production process or they are combined under a Cobb–Douglas type production function. Using post-crisis data from European manufacturing firms, this letter finds the elasticity of substitution between public and private capital to be 3.45, suggesting these widely used assumptions are invalid. Besides, firms with higher dependence on external financing tend to have a higher elasticity of substitution.

Long-Run Growth, Speed of Convergence and the Specification of Technology

Abstract This note analyzes the effect that the specification of technology has on the long-run growth rate and the asymptotic speed of convergence in the one-sector endogenous-growth model. We compare three otherwise identical economies – with the same baseline and parameter values – but with different production technologies: CES, VES or Sobelow, respectively. The long-run growth rate and the asymptotic convergence speed under CES production are lower than the corresponding ones under Sobelow production which, in turn, are lower than those under VES production. This is because a higher elasticity of substitution entails a higher easiness to substitute capital for labor which, in the end, results in a higher long-run growth rate.

Does female labor scarcity encourage innovation? Evidence from China's gender imbalance

AbstractThis paper studies how the scarcity of different types of workers in a region shapes firm innovation across industries, using the unbalanced regional sex ratios in China as a source of identification strategy. The empirical results show that the shortage of female workers has spurred firms in female‐intensive industries to innovate more, particularly in industries with low substitution between female and male workers, consistent with the price effect of the directed technical change theory. In male‐intensive industries with high elasticity of substitution and regions with more skewed local sex ratios, firms are more innovative, demonstrating that the market size effect of the directed technical change theory is also at play.

Are the emissions trading systems’ simulations generated with a computable general equilibrium model sensitive to the nested production structure?

Computable general equilibrium models are becoming popular for simulating emissions trading systems. However, these models make various assumptions about the production structure and the possibilities of substituting energy for productive factors or inputs. Therefore, this study aims to analyze how different options to incorporate energy into the nested production structure of a computable general equilibrium model affect the obtained impacts when an emissions trading system is implemented. A flexible computable general equilibrium model called ECOMODEL is developed, which is the first model that allows choosing any of the three nested production structures most used in the literature (KEL-M, KL-EM, or KLE-M). The Chilean economy is used as a case study since there is a current database with high disaggregation of the energy sector for calibrating the computable general equilibrium model. The results show that the simulated impacts with KEL-M and KL-EM structures are the best when elasticities of substitution equal to the values ​​most frequently used in previous studies are chosen. However, the KEL-M structure that considers energy as a substitute for capital provides overly optimistic environmental results when high elasticities of substitution are used, obtaining the lowest reduction in Gross Domestic Product and the lowest price of the emissions trading system. Furthermore, the KLE-M structure gives unrealistic results regardless of the elasticities of substitution used. In consequence, a KL-EM nested production structure should be prioritized to simulate an emissions trading system since it provides realistic results and is less sensitive to the values of the elasticities of substitution.

Income and factor substitution: an investigation on the Solow growth model under the constant elasticity of substitution

PurposeThe purpose of this study is to examine whether the elasticity of substitution (ES) varies between developed and developing countries.Design/methodology/approachThe author derives the growth regressions from the Solow model under the constant elasticity of substitution production function by using the first-order Taylor series expansion and estimate them for each country group classified based on time-varying behavior of income per worker using the data-driven algorithm.FindingsThe ES is not unitary and varies among country groups. Developed countries generally have a higher ES than developing countries.Originality/valueFor the first time, the author uses the first-order Taylor series expansion to linearize the steady-state value of income per worker, as the author considers this approach to be relatively more straight-forward and tractable. Furthermore, the author estimates the equations using both cross-section and panel data techniques and employs the data-driven algorithm proposed by Phillips and Sul (2007) to classify countries.

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.

The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

AbstractWe take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country‐ and industry‐level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality. The country‐level results are based on 228 capital account liberalization episodes spanning 149 advanced and developing economies from 1970 to the present. Difference‐in‐difference estimation using industry‐level data for 23 advanced economies suggests that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and higher elasticity of substitution between capital and labor.

Unintended consequences of maternity leave legislation: The case of Colombia

Abstract We estimate the impact on female labor outcomes of the extension in maternity leave period from 12 to 14 weeks, an amendment to the Colombian labor law in 2011. To identify this impact, we compare labor market outcomes of different groups of individuals with women of child-bearing age. First we compared two groups of women with different fertility rates (low elasticity of substitution), finding that, as result of the extension, women in the high-fertility age group experience an increase in inactivity, informality, and self-employment. When comparing high-fertility age women with men in the same age group (high elasticity of substitution), we find that the extension increases the probability of unemployment, informality and self-employment and decreases wages of women compared with men.

Work or Housework? Mincer's Hypothesis and the Labour Supply Elasticity of Married Women in Japan

Married women exhibit more elastic labor supply responses to wage changes than do single women or men. Mincer (Aspects of labor economics, Princeton University Press, Princeton, 1962) argued that this is explained by a high elasticity of substitution between market work and home production. To test this hypothesis, I use a sharp change in Japanese tax rates to estimate labor supply and home production elasticities for Japanese workers. The results support Mincer's hypothesis: market and home production are near-perfect substitutes for married Japanese women, while home production effects are modest for other demographic groups. These results contrast with those for the USA, where male and female elasticities have been converging.

THE ELASTICITY OF SUBSTITUTION BETWEEN TIME AND MARKET GOODS: EVIDENCE FROM THE GREAT RECESSION

AbstractWe document a change in household shopping behavior during the Great Recession. Households purchased more on sale, larger sizes, and generic products and increased coupon usage and shopping at discount stores. We estimate a decline in returns to shopping during the recession. Therefore, the increase in shopping behavior implies a significant decrease in households' opportunity cost of time. Using the estimated cost of time and time use data, we estimate a high elasticity of substitution between market expenditure and time spent on nonmarket work. We find that households smooth a sizable fraction of consumption by varying their time allocation during recessions.

Structural Transformation of India: A Quantitative Analysis

This article accounts for the structural transformation of the Indian economy over the recent decades. Empirical estimates imply a relatively higher elasticity of substitution in services than in manufacturing, while the growth rates of labour-augmenting productivity in both of these sectors are of similar magnitude, in contrary to what previous growth accounting exercises suggest. Simulation of a multi-sectoral growth model with these estimates succeeds in replicating the trends of sectoral value-added shares as well as the declining labour shares of value added in manufacturing and services sectors during the sample period. The model improves on previous studies in matching the trends of sectoral shares of employment. Thus, the services sector’s flexibility in factor substitution compared to that of manufacturing can explain, at least in part, the rapid growth of services in the recent period.JEL Classification: O11, O41, O53

The Impact of Extended Employment Protection Laws on the Demand for Temporary Agency Workers

We study the impact of a reform that extended employment protection to temporary agency workers. Leveraging data of manufacturing firms, we show that plants more exposed to the regulation experienced a decrease in revenues and total employment, and that these effects were attenuated in industries with high elasticity of substitution between agency and non-agency workers. We also present evidence that labor misallocation increased because of the regulation, especially at plants in sectors with high elasticity of substitution. A simple model of labor demand in the presence of agency work rationalizes these results.

The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows-financial globalization. Both country- and industry-level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality. The country-level results are based on 228 capital account liberalization episodes spanning 149 advanced and developing economies from 1970 to the present. Difference-in-difference estimation using industry-level data for 23 advanced economies suggests that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and higher elasticity of substitution between capital and labor.

The Aggregate and Distributional Effects of Financial Globalization: Evidence from Macro and Sectoral Data

We take a fresh look at the aggregate and distributional effects of policies to liberalize international capital flows—financial globalization. Both country- and industry-level results suggest that such policies have led on average to limited output gains while contributing to significant increases in inequality—that is, they pose an equity–efficiency trade-off. Behind this average lies considerable heterogeneity in effects depending on country characteristics. Liberalization increases output in countries with high financial depth and those that avoid financial crises, while distributional effects are more pronounced in countries with low financial depth and inclusion and where liberalization is followed by a crisis. Difference-indifference estimates using sectoral data suggest that liberalization episodes reduce the share of labor income, particularly for industries with higher external financial dependence, those with a higher natural propensity to use layoffs to adjust to idiosyncratic shocks, and those with a higher elasticity of substitution between capital and labor. The sectoral results underpin a causal interpretation of the findings using macro data.

The role of flexible biofuel policies in meeting biofuel mandates

The paper analyzes the role of biofuel sector in three major regions (USA, European Union and Brazil). It focuses on the links between volatility in the yields of feedstock and how these yields feed through to changes in the prices of biofuel crops under different rules for managing biofuel mandates. Global Trade Analysis Project (GTAP) model has been calibrated for the years 2007–2012 to derive, endogenously, biofuel production in each year for all the three regions. Further, the study examines four different volatility variations of possible shocks to yields as representative of natural variations in the production of the feedstocks. It analyzes the impacts of changes in the mandated biofuel under the four variations to see what impact they would have principally on the prices of the key agricultural inputs linked to the biofuel sector. The model results indicate that current mandates have significant impact on the biofuel crops. The world biofuels production is expected to increase by 54% by year 2020. EU ethanol from grains and biodiesel are expected to grow by 85% and 49% respectively. The analysis observes high elasticity of substitution between fossil fuel and biofuels, which results in a greater demand for biofuels when yields of feedstocks rise and prices of feedstocks fall.

Energy Transition, Technological Spillovers and Elasticity of Substitution

Countries such as Germany and Switzerland have included the energy transition in their policy programs, setting specific targets in terms of energy production from renewables. However, the energy transition has a cost, which so far has been partly covered by subsidizing the clean production. This has produced an adverse effect, leading to overproduction in the clean sector and negative prices in the electricity spot market. An excessive subsidy, which does not takes into account technological spillovers and the elasticity of substitution, might be the cause. We use endogenous growth theory to study how the cost of the energy transition - proxied by a subsidy - is affected by these two channels. We provide a numerical solution to the model to give an insight into the magnitude of the effect considered. The main findings are: (1) technological spillovers reduce the cost of the energy transition and the subsidy becomes negative after a threshold value of relative spillover intensities; (2) a higher elasticity of substitution between the two sectors increases the cost of the energy transition.