Output Elasticity Research Articles

Profit sharing, industrial upgrading, and global supply chains: Theory and evidence

AbstractThis research constructs a simple model to illustrate the global supply‐chain (GSC) profit sharing and industrial upgrading mechanism, finding that the average profitability distribution in the different supply‐chain stages is determined by three main conditions: (1) the average product of the labor in the firms at each production stage; (2) the production complexity level of each production stage in the chain; and (3) the ratio of the output elasticity of capital to the output elasticity of labor in each stage. This study also proposes a new industrial upgrading mechanism, the “smile‐curve‐driven supply‐chain upgrading,” for supply‐chain firms. Increases in production complexity and level of factor intensity in each production stage are found to be the two essential conditions for the smile‐curve‐driven supply‐chain upgrading. Our static and dynamic panel empirical models, including robustness checks, are both broadly consistent with the theoretical predictions of this paper.

The production approach to markup estimation often measures input distortions

The production approach recovers markups using the output elasticity for a variable and undistorted input. We show using the revenue elasticity for a variable input recovers that input’s wedge. Our result has two implications. First, in the canonical setting with CES demand and monopolistic competition, past research using the production approach with revenue data should be recast as evidence of input, rather than output, distortions. Second, future research can use the production approach with revenue data to study input distortions, provided researchers can measure inputs in physical units. A promising application pertains to labor market distortions.

How to Maintain Sustainable Development of China’s Agriculture under the Restriction of Production Resources? Research with Respect to the Effect on Output of the Substitution of Input Factors

China agricultural development has been facing the problem of resource constraints because its resources per capita such as land and energy are relatively lower than the global average. By applying the provincial agricultural panel data from 2000 to 2015 and fixed effect model based on the translog production function, this paper estimates both output elasticities and substitution elasticities of agricultural inputs, which may provide insights into sustainable agricultural development. The results show that, except for capital, the output elasticities of other production factors are all positive. Energy has always played an important role in agricultural production, whose elasticity in agriculture increased from 0.0203 in 2000 to 0.1694 in 2015. We also find a severe scarcity of land, and the high intensity of energy in the field of agriculture. Moreover, there exists a substitute relationship between all factors, which means that in the short term, one production factor can be employed to replace another to maintain agricultural development. From the empirical results of this paper, some policy suggestions are proposed as follows: it is crucial that more attention should be placed on land and to plan energy use wisely. In addition, on account of the current situation in China, the input of labor force should be stepped up and energy should be used more efficiently to make up for the shortage of land resources. The empirical results and policy suggestions in this paper may benefit the sustainable development of China’s agricultural economy.

Urban bias, migration control and rural land policy: the case of Hukou in China

Abstract Urban-biased politics often drives distortionary policies in many countries. We develop a political economy model in which the government faces a trade-off between retaining urban support and expanding its industrial rent base. The model shows that while an increase in urbanization strengthens the government’s incentives to adopt rural land reform and to encourage rural–urban migration, an increase in urban productivity has the opposite effect. These effects are mediated by the income share of labor in the rural sector, the political power of urban residents and the labor elasticity of urban output. Using China’s context, we illustrate that the model’s predictions are consistent with the observed policies on land ownership and rural–urban migration.

Moderate wage increases and flexible labour contracts to protect employment in Colombian manufacturing

Based on conditional and unconditional demands for labour, we exploit the variations of real minimum wage across manufacturing subsectors to present evidence that this variable affects formal employment. The long-term elasticity of labour demand to the minimum wage is around –0.7. Accordingly, increases in the minimum wage lead to job losses for unskilled labour, mainly in plants with fewer than 100; thus, small increases in the minimum wage are desirable to protect employment. Labour demand is highly cyclical: the output elasticity is about 1.7. Thus, some flexibility in labour contracts is desirable to reduce the link between employment and variation of plants’ sales. Open-ended labour contracts might allow reductions of the nominal wage rather than inducing job losses during periods of severe slumps, as has happened during the COVID-19 pandemic.

Labor Share Dynamics and Factor Complementarity

Abstract This paper investigates the mechanism behind the cyclical movements in the labor income share. We build a dynamic stochastic general equilibrium model with search and matching frictions to examine the counter-cyclicality and overshooting of the labor income share, following a technology innovation. This model features (i) a time-varying output elasticity of labor, generated from the capital–labor complementarity under a constant-elasticity-of-substitution production function, and (ii) an endogenous markup variation, generated from wage/price rigidity. Through the output elasticity and markup channels, the capital–labor complementarity interacts with wage rigidity, which allows us to produce a satisfactory matching of the amplitude of the labor share overshooting observed in the data. The amplitude of the labor share overshooting is more significant when wages (prices) are more (less) sticky, and when the government’s interest rate rule is more (less) responsive to the deviation in the inflation (output) target.

Promoting product idea contribution of heterogeneous users for product improvement in online innovation communities

ABSTRACT Collaboration between firms and product users has been widely practiced to enhance the efficiency and quality of product development. We consider a collaborative product improvement setting where a sponsoring firm and product users jointly create or promote product design ideas through firm-sponsored online user innovation communities (FOUICs). Using a differential-game framework, we study a benchmark case in which product users involved in FOUICs are homogeneous in their innovative contribution capacities and propensities. We then incorporate users’ heterogeneity such that product users are distinguished into lead users and common users. Our analytical result shows that the equilibrium effort levels and utilities of both the sponsoring firm and product users may increase or decrease with a change in the output elasticities of product design ideas or in the cost elasticities of the effort levels. Moreover, lead users’ equilibrium effort level and utility are more sensitive to the elasticity parameters of product users’ effort than those of common users, and lead users obtain a higher total incentive reward than that of common users. Last, we compare the benchmark model and the extended model to identify the condition under which one model outperforms the other one for both the sponsoring firm and product users.

Equity and Efficiency in Women-Empowered Contract Farming: An Explanatory Case Study on the Tea Estate Sector of Sri Lanka

Essentially, equity and efficiency are integral parts of any economic activities of sustainability though the correlation and causation between those two constructs are not considered significant. This study intends to evaluate if the contract farming system is a sustainable solution to the prevailing socio-economic aspects of the labor productivity problem in the tea estate sector of Sri Lanka, where female workers are highly depressed. This study has employed the survey strategy within the instrumental case of a selected tea estate to assess equity and efficiency of women-empowered contract farming system. The analytical results for gender equity on input and performance indicators have proven that gender equity is maintained in contract farming at the sample tea estate. The efficiency analysis results revealed that the output elasticity of tea bushes is significantly lower for female farmers than male farmers. However, there is no such significant difference revealed in the output elasticity of labor between gender groups. These findings explicitly reveal that the female workers in the tea estate sector are capable of managing labor although they are dominated by males in the domesticity. It further implies that a transformation of the male-dominant culture of the tea estate community would enhance the entrepreneurial and leadership capabilities of female workers if they are provided with equal opportunities and freedom.

China’s factor reallocation effect considering energy

Decomposing growth rate of total factor productivity (TFP) into internal growth effect and the effect of factor reallocation formed by the flow of capital, labor and energy between sectors, we took 23 subsectors as the research object and adopted the multi-sector growth accounting framework (MSGAF) to verify the ‘structural bonus hypothesis’ from 2005 to 2017. The study drew the following conclusions: First, internal growth effect represented by sectoral technology progress was still the main contributor to TFP growth of the overall economy, but the contribution rate had decreased. Second, the reallocation effect of capital changed from structural burden to structural bonus. Third, the reallocation effect of labor showed a trend of first rising and then falling, changing from structural bonus to structural burden. Forth, the effect of energy reallocation was gradually emerging, with a shift from structural burden to structural bonus. Based on these research results, we argue that more attention should be paid to the efficiency of factor reallocation in addition to the technology progress. The inefficiency of factor reallocation caused by imperfect market and asymmetric information would partially offset the effect of technology progress and hinder the high-quality economic development. In view of the reallocation of capital, labor and energy, we propose the following suggestions: For capital, macro-control and market mechanism should be comprehensively accounted for. Further, capital must be allocated per the principle of profit maximization to ensure that its elasticity and allocation efficiency will be improved. The reallocation of labor should not only be limited to the 3-sector level. More attention should be paid to the marginal output differences within the secondary sector. For energy, attention should be paid to the elasticity of energy output between sectors to avoid inefficient allocation. It is also necessary to accelerate the phase-out of industries with high energy consumption and high pollution, promote the development of low energy industries to encourage ‘energy conservation and emission reduction’ as well as ‘green development’ by increasing the effect of energy reallocation.

Sectoral heterogeneity, industrial structure transformation, and changes in total labor income share

• Build a multi-sector dynamic general equilibrium model to characterize the impact of sectoral heterogeneity on the industrial structure transformation and labor income shares, and then perform it with numerical simulations result. • Find that the changing direction of total labor income share is same as the labor share of labor-intensive industries. • Explain the “U-shape” trend of China's total labor income share changes. • Help to further understand the economic connotation of the time-varying elasticity production function model and the ongoing structural transformation of China's economy. In recent years, China's labor income share has undergone substantial changes and the evolution of income distribution is inseparable from the process of industrial structural transformation. From the perspective of sectoral heterogeneity, this study develops Ngai and Pissarides’ (2007) model, constructing a multisector dynamic general equilibrium model. We propose that technological progress or capital deepening will promote the flow of production factors among sectors, with the direction dependent on the substitution elasticity between products, sectoral differences in the rate of technological progress, factor output elasticity, and elasticity of factor substitution. This process of factor flow also causes changes in total labor income share, and the direction parallels the labor share of labor-intensive industries. Combining the development data of China's three major industries during different periods, the results demonstrate that in the industrial period, labor flows from the agricultural sector to the industrial sector and the total labor income share decreases; in the postindustrial period, labor flows from the industrial sector to the service sector and the total labor income share increases. The contribution of this study is in presenting a comprehensive and systematic examination of the impact of sectoral heterogeneity on industrial structure transformation and labor income share, which explains the U-shaped trend of China's overall total labor income share and also helps to further understand the structural transformation of the Chinese economy.

Estimation of a varying coefficient, fixed-effects Cobb–Douglas production function in levels

We propose a semiparametric varying coefficient estimator for a Cobb–Douglas production function for panel data with several practical features. First, we estimate the model without a log transformation to avoid induced non-negligible estimation bias. Second, we disentangle the impact of traditional inputs from that of environment variables, which impact output indirectly through altering the output elasticity of inputs and the state of technology via unknown functions. We introduce a linear index structure in the unknown functions to circumvent the curse of dimensionality, and allow the output elasticity of different inputs to depend on different environment variables. Third, our technology function accounts for latent heterogeneity across individual units, which can be freely correlated with inputs and/or environment variables. Our estimator combines series and kernel methods for both the unknown parameters and functions. We demonstrate that the proposed estimator exhibits promising finite-sample performance.

Identification of R&D Paradox after the Global Financial Crisis: Korean Case Focusing on the Smart Convergence and Conventional Industries

This article empirically explores whether the Korean research and development (R&D) paradox has been intensified during the post-global financial crisis (2009–2018). We employ the augmented production function model to test the intensified R&D paradox, which is defined as a continuous decline in a firm’s output elasticity of R&D investment. Using a data set of 720 R&D-active firms, which have ever received more than one government funding, this study drew the following major conclusions on the whole sample firms and two sub-sample firms (smart convergence and conventional industries). First, the R&D paradox has been intensified in the post-global financial crisis over the past decade. Second, the smart convergence industry shows higher a firm’s output elasticity of R&D investment than the conventional one does. Third, in recent years, R&D investment failed to even have significant effect on the value-added. Last, a firm’s output elasticity of R&D investment was found to be much more vulnerable in large and semi-large firms than in SMEs in Korea. In sum, this study confirms the intensified Korean R&D paradox during the post-global financial crisis in Korea. We discuss the government’s role in resolving the R&D paradox in Korea.

Cognitive Computing for Decision-Making and Choice Modeling of the Interactive Relationship Between Local Higher Education Development and Regional Economics

Higher education plays an important role in the construction of a new growth engine of China’s economy under the new normal state. If innovation is likened to a new engine of economic growth in China, higher education is equivalent to energy and fuel provided by the engine energy for intellectual support and knowledge support. Based on Denison factor analysis, the panel data of 30 provinces in the east, middle and west of China from 1997 to 2014 was used to conduct the Cognitive computing for decision-making and choice about the impact of higher education level of human resources on China’s economic growth. The results show that the output elasticity of material capital gradually decreases from west to east, while the output effect of higher education increases gradually from west to east.

Tax evasion and optimal corporate income tax rates in a growing economy

AbstractWe explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro [(1990)Journal of Political Economy98, 103–125], the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.

Analysis on the Output Elasticity and Contribution Rate of Energy Consumption to Economic Growth in China’s Yangtze River Economic Zone

Analysis on the Output Elasticity and Contribution Rate of Energy Consumption to Economic Growth in China’s Yangtze River Economic Zone

Innovation or Imitation: Empirical Test Based on EPS Global Statistics

Technological progress is an important embodiment of innovation‐driven, but also the main determinant of sustained economic development. Technological advances lie in the introduction of technology, learning, imitation, and independent research and development. The introduction of technology to developing countries can accelerate technological progress, reduce the technology gap, and promote sustained and rapid economic development. If the technology gap between developed and developing countries is, in fact, gradually shrinking, then the continual introduction and imitation of new technology can easily lead to “path dependence” and technical bottlenecks in developed countries. This trend may also be unfavorable for the protection of intellectual property rights. Due to the externality of knowledge and the cost of imitation, there exists an internal Nash equilibrium point between the R & D strategy and the imitation strategy. In this article, we use population dynamics and the replicon dynamics of R & D and imitation, as well as equilibrium conditions, to optimize the investment path of the enterprise. The balance between the number of R & D and the number of imitators depends on the proportion of the output elasticity of the R & D enterprise. Due to the existence of this balance, the rate of technological progress and the rate of capital growth were found to increase in proportion. Our empirical analysis confirmed this result and found that the transnational flows of the factor affect stability. Therefore, innovation‐driven technological progress was found to be an important determinant of sustained economic growth.

Conventionalists, Pioneers and Criminals Choosing Between a National Currency and a Global Currency

The article analyzes how conventionalists, pioneers and criminals choose between a national currency (e.g. a central bank digital currency) and a global currency (e.g. a cryptocurrency such as Bitcoin) that both have specific characteristics in an economy. Conventionalists favor what is traditional and historically common. They tend to prefer the national currency. Pioneers (early adopters) tend to break away from tradition, and criminals prefer not to get caught. They both tend to prefer the global currency. Each player has a Cobb-Douglas utility with one output elasticity for each of the two currencies, comprised of backing, convenience, confidentiality, transaction efficiency, financial stability, and security. The replicator equation is used to illustrate the evolution of the fractions of the three kinds of players through time, and how they choose among the two currencies. Each player’s expected utility is inverse U-shaped in the volume fraction of transactions in each currency, skewed towards the national currency for conventionalists, and towards the global currency for pioneers and criminals. Conventionalists on the one hand typically compete against pioneers and criminals on the other hand. Fifteen parameter values are altered to illustrate sensitivity. For parameter values where conventionalists go extinct, pioneers and criminals compete directly with each other. Players choose volume fractions of each currency and which kind of player to be. Conventionalists go extinct when criminals gain more from criminal behavior, and when the parameter values in the conventionalists’ expected utility are unfavorable, causing competition between pioneers and criminals.

Micro-mechanisms behind declining labor shares: Rising market power and changing modes of production

I derive a micro-founded framework showing how rising firm market power on product and labor markets and falling aggregate labor output elasticities provide three competing explanations for falling labor shares. I apply my framework to 20 years of German manufacturing sector micro data containing firm-specific price information to study these three distinct drivers of declining labor shares. I document a severe increase in firms’ labor market power, whereas firms’ product market power stayed comparably low. Changes in firm market power and a falling aggregate labor output elasticity each account for one half of the decline in labor's share.

Sectoral Compositions of Output and Employment in India: Are We Moving Towards Jobless, Job-loss or Job-enabled Growth?

Indian economy, after maintaining a very low growth rate in the pre-reform phase, experienced high growth rate of its income in the post-reform phase. But the sparking growth rates in India after the onset of the liberalisation policy has questioned its sustainability in terms of sufficient employment generations. The present study aims to find out whether the aggregate economy and the sectors within it are moving towards jobless, job-loss or job-enabled growth for the period 1973–2018. The study thus calculated the output elasticity of employment in total period and phase-wise periods, and obtained that the values of the output elasticity of employment show no sign of sparking employment growth like that of the income. The average values of the elasticity of employment lie mostly less than half which signify the emergence of jobless growth. In some years, there are job-loss growths as well, mainly in industrial sector. Hence, it can be inferred that the Indian economy is not going in the right directions so far as employment opportunity is concerned; putting a big question on attaining the sustainable developmental goal. JEL Classification: J21, J64, O10

Economic effects of climate change on agricultural production and productivity in Latin America and the Caribbean (LAC)

AbstractClimate projections indicate that temperatures in Latin America and the Caribbean (LAC) will rise by between 1.6 °C and 4 °C by the end of the century while changes in precipitation levels are expected to vary significantly across the region. This article estimates the impact of climate change on total factor productivity (TFP) and production. It combines data from the University of East Anglia's Climatic Research Unit (CRU), the Intergovernmental Panel on Climate Change (IPCC), and the Food and Agriculture Organization (FAO) on 28 LAC countries for a 54‐year period (1961–2014) in order to inform policy makers of the cost of output losses in the absence of viable climate adaptation strategies. We use estimates of a random‐parameter stochastic production frontier (SPF) model specification to capture heterogeneity in technology and partial output elasticities across countries and unobserved environmental characteristics. Results show that change in output is mainly driven by an average annual TFP growth rate of .95%. Climate change induces significant reductions (9.03–12.7%) in productivity over the 2015–2050 period. In terms of output, these losses range from USD $14.7 to $31.4 billion dollars in the LAC region, depending on the scenario and the discount rate used.