Morishima Elasticity Of Substitution Research Articles

Exploring the substitution within clean energy: Evidence from China's top 14 hydropower provinces

This paper quantitatively examines the substitution effects within China's clean energy sector, focusing on the hydropower and new energy generation sectors across the top 14 hydropower-producing provinces, which collectively contribute to over 80 % of the country's total hydropower output. To provide a comprehensive analysis of regions that significantly influence national trends, the study utilizes the Cross-Price Elasticity (CPE) and Morishima Elasticity of Substitution (MES). CPE measures how the quantity demanded of one energy source responds to a change in the price of another, while MES assesses the sensitivity of the ratio between two energy inputs to price changes. A Seasonal Autoregressive Integrated Moving Average (SARIMA) model is employed to forecast energy substitution dynamics, offering robust predictive accuracy. The average MES between clean energy and thermal power is 0.663, indicating a moderate substitution relationship, with the effect more pronounced in summer. Additionally, the mean MES between hydropower and new energy generation is 2.067, reflecting a strong substitution effect between these two clean energy forms. Furthermore, the SARIMA model shows a mean squared error (MSE) as low as 0.0006 in some cases, demonstrating its robust predictive accuracy in forecasting energy substitution dynamics. These results offer empirical support for policies aimed at reducing reliance on thermal power and promoting clean energy development in key provinces.

Examining techno-economic interactions among fish species: A case of small-scale demersal fishery

Using the multi-product dual revenue function framework, this paper examines the nature and extent of technical and economic interactions among five demersal species of Al-Batinah demersal fishery, Oman during the 2010–2016 period. The parameters of the system of output supply functions are estimated using Zellner's seemingly unrelated regressions (SUR) technique. The likelihood ratio test in relation to the structure of the multi-output production technology rejects the null-hypothesis of input-output separability and non-jointness in inputs. These results suggest that the underlying production technology is non-separable between the outputs and the quasi-fixed input, and the harvesting level of one species is likely to have spill-over economic effects on the harvesting levels of others. The own-price elasticities of output supply are found to be positive, inelastic, and statistically significant in four out of five cases suggesting that, other things being equal, fishers' supply decisions are influenced by the prevailing market prices of outputs. The estimated values of the cross-price elasticity of supply are negative, inelastic and statistically significant at the 5% level for eight output pairs. The calculated values of the Morishima elasticity of substitution (MES) indicate the presence of substitutability between ten output pairs. The cross-price elasticity estimates are in the range of −0.001 (between Emperor and Catfish) to −0.275 (between Seabream and Grouper) which is lower (in absolute value) than that of the MES estimates. The magnitudes of the cross-price elasticity and the MES estimates indicate the extent of spill-over effects of one species on the other and signal the extent of species targeting by fishers. A statistically significant spatial, seasonal, and inter-annual variability is observed in all species cases. Finally, the implications of the findings are discussed from the perspective of developing effective management approaches, achieving sustainability of fisheries resources and improving fishers' socio-economic conditions stipulated in the Five-Year development plans for the sector.

The Electricity Rebound Effect: Empirical Evidence From the Chinese Chemical Industry

The Chinese government has adopted many policies to save energy and electricity in the chemical industry by improving technology and reforming its electricity market. The improved electricity efficiency and the electricity reform may indirectly reduce expected energy and electricity savings by decreasing the effective electricity price and the marginal cost of electricity services. To analyze the above issues, this paper employs the Morishima Elasticity of Substitution of the electricity cost share equation which is estimated by the DOLS method. The results show that: 1) There exists a rebound effect in the Chinese chemical industry, but it is quite large because the electricity price is being controlled by the government; 2) the reform of the electricity market reduces the rebound effect to 73.85%, as electricity price begins to reflect cost information to some extent; 3) there is still a lot of space for the reform to improve, and the rebound effect could be reduced further once the electricity price is adjusted to transfer the market information more correctly. In order to succeed in saving electricity and decreasing the rebound effect in the chemical industry, the policy implications are provided from perspectives of the improved energy efficiency and electricity pricing mechanism.

Tradeoffs between agricultural production and ecosystem services: A case study in Zhangye, Northwest China

Humans have increasingly intervened in the nature to advance socioeconomic development at the expense of ecosystem services. Tradeoffs between ecosystem services and socioeconomic development are inevitable and should be considered in sustainable ecosystem management. This is no exception in Zhangye where intensive agricultural activities have significantly affected its ecological conditions. Thus, this study evaluated the tradeoffs between agricultural production and key ecosystem services along with their spatial distributions at the watershed level in Zhangye based on multisource observation data. The key ecosystem services, including net primary productivity (NPP), water yield, and soil conservation, were evaluated for the years 2000, 2010, and 2015 using remote sensing data and the InVEST model. The Morishima elasticity of substitution (MES) between these ecosystem services and agricultural production were then estimated by applying a quadratic directional output distance function, and mapped to determine the tradeoffs. The results showed that the average NPP and annual water yield respectively increased by 22% and 24%, while annual soil conservation decreased by 22% during 2000–2015. The average MES values for agricultural production with NPP, water yield, and soil conservation were 0.14, −0.69, and −0.56, respectively. This indicated the existence of a synergetic relationship between agricultural production and NPP as well as tradeoff relationships between agricultural production and water yield/soil conservation. Differences in the spatial patterns of the relationships between agricultural production and these ecosystem services were observed. Significant tradeoff relationships were observed for agricultural production with water yield and soil conservation in the upper reach of Zhangye. It indicated that increasing agricultural production would be at the cost of decreased water yield and soil conservation, especially in the upper reach area. The quantification and spatial pattern determinations of tradeoffs between ecosystem services and agricultural production is useful for the development of regional ecological conservation policy and sustainable ecosystem management.

Heterogeneity and asymmetric effects in energy resources allocation of the manufacturing sectors in China

Using the trans-log cost function and elasticity model, this paper pioneered the analysis of the elasticity and characteristics of the substitution between energy consumption and capital in China's manufacturing industry between 1995 and 2014. Firstly, the research revealed significant differences in the magnitude and direction of the substitution between coal, electricity, petroleum, and capital, thus demonstrating heterogeneity in the substitution. Secondly, the analysis, based on the Morishima Elasticity of Substitution (MES) model showed that: 1) depending on what triggers changes in factor prices, the manufacturing sector shows a reverse asymmetry whereby capital substituted energy and energy complemented capital 2) a significant asymmetry exists in the direction and magnitude of substitution in capital- and labor-intensive sectors. This asymmetric effect indicates that China can attain overall energy conservation and apply energy-saving technologies in the manufacturing industry by implementing the substitution of capital for energy. However, the differences with regards to the forms of energy consumption among sectors, as well as the heterogeneity and asymmetry in capital–energy substitution should be considered in research on energy policies for the manufacturing industry. This should also involve the integration of energy sources to ensure that such policies are targeted and effective.

Determinants of energy intensity in Chinese provinces

How can limited energy resources ensure a continuous development of the Chinese economy? In the study, we have employed the 1995–2014 data of China's 29 provinces (Autonomous Regions and Municipalities) for an energy intensity analysis in the three approaches of panel regression, Morishima elasticity of substitution, and decomposition of energy intensity. The study finds first of all that the prices of China's energy and capital are distorted because of excessive intervention by the government at all levels. The seriously distorted prices have prevented energy from being effectively replaced by labor and capital inputs in most regions, and the distortion of energy prices was much more serious than that of labor and capital; second, technological changes, scale, and pure efficiency have played a weak role in energy intensity reduction, and the increasing energy supply constraints for each region have had no significant effect on the decline of energy intensity; third, the effects of factor substitution on energy intensity reduction have remained more evident in the Bohai Rim, Northeast, Central, Southwest and Northwest of China, while the industrial share has played a crucial role in the decline of energy intensity of the Yangtze River Delta and the Southeast coastal areas. These findings imply that the Chinese authorities are expect to revise its price generation mechanism for factor inputs, develop targeted energy-efficient technology, and enable technical progress to become the major driver of China's economic growth.

Preferences, entry, and market structure

We provide a unified approach to imperfect (monopolistic, Bertrand, and Cournot) competition when preferences are symmetric over a finite but endogenous number of goods. Markups depend on the Morishima elasticity of substitution and on the number of varieties. The comparative statics of free‐entry equilibria is examined, establishing the conditions for markup neutrality with respect to income, market size, and productivity. We compare endogenous and optimal market structures for several non‐CES examples. With a generalized linear direct utility, the markup can be constant and optimal under monopolistic competition, and nonmonotonic in the number of firms under Bertrand or Cournot competition.

General equilibrium models with Morishima elasticities of substitution in production

Analytical general equilibrium (AGE) models are important tools that economists use to answer questions about theory and policy. When a production function has three or more inputs, the traditional modeling technique employs Allen elasticities of substitution to represent general functional forms. This paper builds an analytical general equilibrium model using the Morishima elasticity of substitution (MES). Specifically, an existing model using Allen elasticities is reformulated to employ the MES and the new, closed-form solutions are interpreted with additional insights from the reformulation. Importantly, the special case of constant elasticity of substitution (CES) production follows directly when using Morishima elasticities, but not Allen elasticities. This paper also provides a general technique for switching from Allen to Morishima elasticities in any existing AGE model and demonstrates a one-to-one numerical equivalence regardless of the elasticity measure employed. Replicating prior results, plausible parameter values are applied to the reformulated model to analyze the source-side, distributional effects of a pollution tax and highlight how the Allen and Morishima elasticities differ.

Research Commentary—Information Technology Substitution Revisited

Taking advantage of the opportunities created by the price adjusted performance improvement in information technology (IT) depends in part on the ability of IT capital to substitute for other inputs in production. Studies in the information systems literature and most economics training examining the substitution of IT capital for other inputs use the Allen elasticity of substitution (AES). We present a less-well-known measure for the elasticity of substitution, the Morishima elasticity of substitution (MES). In contrast to the AES, which is misleading when there are three or more inputs—such as non-IT capital, labor, and IT capital—the MES provides a substitution measure where the scale is meaningful, and the measure differs depending on which price is changing. This is particularly important for IT capital, because prices have been declining, and there is evidence that IT capital can substitute for non-IT capital or labor in a qualitatively different way than non-IT capital and labor substitute for each other. Methodologically, we also show the impact of imposing local regularity—for example, monotonicity of output from increases in inputs—which we do through Bayesian methods employed to estimate the underlying functions that are used to calculate various measures of substitution. We demonstrate the importance of the MES as an underrecognized measure of substitution and the impact of imposing local regularity using an economy-wide industry-level data set covering 1998–2009 at the three-digit North American Industry Classification System code level. Our MES results show that reductions in the price of IT capital increase the quantity of IT capital in use, but are unlikely to change the input share of IT capital—the value of IT capital as a proportion of the value of all inputs—in contrast to major studies using the AES. In addition, estimates for both elasticities of substitution are more stable after imposing local regularity. Both of these advances—that is, the MES and imposing local regularity—have the potential to impact future work on IT productivity, IT pricing, IT cost estimation, and any type of analysis that posits the substitution of IT capital for non-IT capital or labor.

Information technology substitution revisited

Taking advantage of the opportunities created by the price adjusted performance improvement in IT depends in part on the ability of IT capital to substitute for other inputs in production. Studies in the IS literature as well as most economics training that examine substitution of IT capital for other inputs use the Allen elasticity of substitution (AES). We present a less-well-known measure for the elasticity of substitution, the Morishima Elasticity of Substitution (MES). In contrast to the AES which is misleading when there are three or more inputs – such as non-IT capital, labor and IT capital – the MES provides a substitution measure where the scale is meaningful, and the measure differs depending upon which price is changing. This is particularly important for IT capital as prices have been declining and there is evidence that IT capital can substitute for non-IT capital or labor in a qualitatively different way than non-IT capital and labor substitute for each other. Methodologically we also show the impact of imposing local regularity – for example, monotonicity of output from increases in inputs – that we do through Bayesian methods employed to estimate the underlying functions that are used to calculate various measures of substitution. We demonstrate the importance of the MES as an under-recognized measure of substitution and the impact of imposing local regularity using an economy-wide industry-level dataset covering 1998-2009 at the three- digit NAICS level. Our MES results show that reductions in the price of IT capital increase the quantity of IT capital in use but are unlikely to change the input share of IT capital – the value of IT capital as a proportion of the value of all inputs, in contrast to major studies using the AES. In addition, estimates for both elasticities of substitution are more stable after imposing local regularity. Both of these advances – that is, the MES and imposing local regularity – have potential to impact future work on IT productivity, IT pricing, IT cost estimation and any type of analysis that posits the substitution of IT capital for non-IT capital or labor.

Do U.S. food processors respond to sweetener-related health information?

This study examines the differential effects of relative prices and sweetener-related health information on the substitutability between sweeteners in the U.S. food processing sector. Results suggest that cane and corn sugar are gross complements, Allen complements, but Morishima substitutes. Furthermore, the Morishima elasticity of substitution (MES) is more responsive to changes in relative prices than to changes in health information. In addition, the MES for cane- and corn-based sweeteners is more responsive to health information from popular media sources than scientific and medical publications. [EconLit citations: D240, I180, Q110]. © 2010 Wiley Periodicals, Inc.

The sawmill industry of the Lake States: a study of productivity, technological change, and factor demand

A translog variable cost function of the sawmill industry in Michigan, Minnesota, and Wisconsin was estimated using pooled time-series data for the period 1963–1996 with inputs labour, materials, and capital. The estimated model imposed Hicks-neutral technical change and allowed for nonconstant returns to scale as well as nonunitary elasticities of substitution amongst the inputs. Results for the Allen–Uzawa partial elasticity of substitution and the Morishima elasticity of substitution indicate that the three inputs were inelastic substitutes. The own-price elasticities of demand and the cross-price elasticities were all inelastic. The industry exhibits increasing returns to scale and positive technical change. Total factor productivity was increasing by 0.69%/year over the study period.

Substitutability and Accumulation of Information Technology Capital in U.S. Industries

1. IntroductionFor the last couple of decades, the U.S. economy has invested in information technology (IT) equipment and software at an extraordinary rate relative to other types of inputs. This rapid accumulation of IT capital per hour worked, known as IT capital deepening, has become one of the major contributors to labor productivity growth in the U.S. economy at both the aggregate and industry levels.1Jorgenson (2001) points out that an essential source of IT capital deepening is the substitution of IT capital for other inputs, induced by a rapid decline in IT prices. As a factor of production, however, the demand for IT capital depends not only on its own price but also on the degree of substitutability between IT capital and other inputs. Thus, it is crucial to investigate the degree of substitutability between IT capital and other inputs in order to explain a rapid IT capital deepening.2In this article, we estimate the elasticities of substitution between IT capital and other factors of production using data on 41 U.S. industries for the period from 1984 to 1999. In a cost function framework, we measure the cross-price elasticity (CPE), the Allen elasticity of substitution (AES), and the Morishima elasticity of substitution (MES). Based on these elasticity estimates, we also explore the quantitative importance of IT substitution in IT capital deepening.We find that the substitutability of IT capital for other inputs was an essential component in explaining the shift in production technique toward IT capital for U.S. industries. Estimated elasticities of substitution indicate that IT capital is a substitute for other factors of production such as labor, non-IT equipment, structures, and intermediate inputs. In particular, the degree of substitutability between IT capital and other inputs is higher in the manufacturing sector than in the service sector and is higher in the less IT-intensive sector than in the IT-intensive sector.We also find that IT substitution is an important contributor to IT capital deepening (relative growth of IT capital to hours worked). We decompose IT capital deepening into a substitution effect, an output expansion effect, and a technical change effect. The results show that the substitution of IT capital for other inputs explains about 60% of total IT capital deepening in the U.S. economy for the period from 1985 to 1999.This article is organized as follows. Section 2 compares various measures of the elasticity of substitution in a cost function model and presents the method for the decomposition of IT capital deepening. Section 3 describes the data used in this study and presents the empirical framework. Section 4 reports estimation results on the elasticities of substitution between IT capital and other inputs and the results on the decomposition of IT capital deepening. Section 5 concludes the article.2. Elasticity of Substitution and IT Capital DeepeningElasticity of SubstitutionIn the case of only two inputs, the elasticity of substitution (σ) between the two inputs x1 and x2 is defined as(Formula Omitted. See article image.) where pi is the price of input i. Thus, the elasticity of substitution, originally introduced by Hicks (1932), shows the degree of input substitutability by measuring the elasticity of the input ratio with respect to the input price ratio (the marginal rate of technical substitution).3When there are more than two inputs used in production, there is no unique measure of substitutability. A conventional measure is the AES introduced by Allen (1938). As shown in Uzawa (1962), the AES between inputs i and j for a twice-differentiable cost function (C) is defined as(Formula Omitted. See article image.) where the subscripts denote partial derivatives with respect to input prices. …

Currency substitution in Asian countries

The objective of this study is to investigate the importance of the U.S. dollar to six Asian economies, as a substitute or complement to domestic monetary assets. Towards this goal, the Morishima elasticity of substitution is estimated between domestic currency, the U.S. dollar and time and savings deposits at commercial banks in Indonesia, Japan, Korea, Malaysia, Singapore and Thailand over the period 1977 to 1996. We observe that the domestic currency and the U.S. dollar are Morishima substitutes in every country, and the demand for the U.S. dollar relative to the domestic currency appears to respond more to a change in the opportunity cost of holding domestic money (exchange rate depreciation) than the opportunity cost of holding the U.S. dollar (the domestic interest rate). A higher degree of currency substitution is found in Japan, Korea, and Singapore than the rest of the countries. Moreover, there is an indication of an increasing degree of currency substitution over time in every country except for Malaysia. Currency substitution creates a channel for the transmission of exogenous monetary disturbances from abroad. The vulnerability of money demand in the face of foreign shocks increases pressure on the monetary authorities to accommodate these shocks under a pegged exchange rate system. The cost of this accommodation proved to be unsustainable during the Asian crisis as foreign reserves were drawn down. Hence, there is the need to build up an adequate foreign reserves position to accommodate the degree of currency substitution and dollarization.

Production Structure, Factor Substitution, and Total Factor Productivity in the South African Agricultural Sector

The production structure of the South African agricultural sector is analyzed using duality theory in production and cost. An unrestricted translog cost function is estimated, and a number of model restrictions (homothetic, homogenous, unitary elasticity of substitution, Hick’s neutral technical change, and no technical change) are tested for, but none of them was found to be statistically significant. The Allen Elasticity of Substitution (AES) and the Morishima Elasticity of Substitution (MES) are calculated to analyze factor substitution, and found that the AES may give erroneous results in the case of number of factors exceeding two. The substitution of land is found to be easiest while that of fuel to be hardest. Furthermore, technical change is found to have a negative impact on agriculture, but there are increasing returns to scale in South African agriculture. However, technical change dominates over scale effect, and results in negative total factor productivity growth. When these results are combined with the finding that, it is easier to substitute machinery by labor than vice-versa, it appears that labor-intensive technologies may be useful for agriculture growth.

Substitution elasticities between durable and nondurable goods in the United States: New evidence from the dynamic Laurent system

This paper uses the dynamic Laurent demand system to jointly estimate the service flows from durable and nondurable goods. The parameter estimates are used to obtain the Morishima elasticity of substitution between goods for the United States from 1960:1 to 1991:4. One of the significant results of this study is that the Morishima elasticities of substitution vary over time instead of being constant. This result implies that the use of the CES functional form gives a poor approximation of the demand system for the data used in this paper. Another important result is that consumers adjust to their long-run equilibrium holding of consumption goods slowly rather than quickly.

To Tell the Truth about Interpreting the Morishima Elasticity of Substitution

The Morishima Elasticity of Substitution (MES) is often used to measure the change in relative factors for a change in price. This paper develops a generalized factor ratio elasticity of substitution (FRES) that nests the MES as a special case. By comparing the FRES with the MES under cost minimization, output or utility maximization, and profit maximization, this paper shows the narrow conditions under which the MES can be correctly interpreted as a measure of the percentage change in relative factors for a percentage change in price. An empirical example demonstrates how misleading the MES can be for this purpose.

Measuring Substitution in Monetary-Asset Demand Systems

The Allen elasticity of substitution (AES) is widely used to study monetary-asset substitution and structural demand stability. Blackorby and Russell showed that the AES is uninformative and that the Morishima elasticity of substitution (MES) is the appropriate measure, a point overlooked in the monetary literature. Use of improper measures can lead to incorrect inferences. This article considers five alternative measures of substitution—the AES, the MES, the Hicksian and Marshallian elasticities of demand, and Mundlak's unencountered, but appealing, constant-cost elasticity of substitution. Selection of the substitution measure appropriate to respective research questions is addressed.